‘How much should I worry about drawdown charges?’
I’m researching my options before going into drawdown and came across some research that suggests charges can range between 0.4% and 1.6%. Is a price difference of 1.2% worth worrying about?
Emma, via email
High costs and charges can have a huge impact on your retirement, so making sure these are kept as low as possible is a sensible approach.
While a difference of one percentage point or so might sound insignificant, over the long-term those costs can seriously add up.
Let’s use the two extremes cited in your example (the range of charges in drawdown set out by City regulator the FCA) – from 0.4% at the bottom end and 1.6% at the top.
Take someone with a £100,000 pension pot at age 65 who withdraws 5% a year from their fund, increasing each year in line with inflation. In other words, they take an income of £5,000 in today’s prices.
If we assume performance is unaffected by charges and the fund returns 5% each year, a 0.4% charge would see the fund run dry by age 93. That means the individual would have received £176,000 of income from their pot in total.
However, if we increase the charge to 1.6% and keep everything else the same, the fund runs out by age 88 and the individual has received just £144,000 in income. So an additional £32,000 has been swallowed up in fees over the course of their retirement.
Charges are not the be-all-and-end-all, and some fund managers will argue they deliver value by outperforming their cheaper rivals.
But it is an indisputable fact that by keeping costs as low as possible, you can squeeze thousands of pounds more out of hard-earned pensions.
Here are some easy ways to keep your costs down.
1. Shop around the market, both for the right product (usually annuity, drawdown or a mix) and the right provider
2. Keep a close eye on costs and charges, and be ready to switch if you can get a better deal elsewhere
3. Avoid overtrading (buying and selling investments too often in retirement) as this could push up your costs
4. Review everything – from provider to how much you’re withdrawing and your investment choices – regularly
5. Don’t stick your head in the sand. Almost a third (30%) of people who had entered drawdown since April 2015 we surveyed had no idea what had happened to their fund since. If markets take a dip you may need to look again at how much you’re withdrawing or risk running out of money early. If you don’t review you’re effectively trusting to blind luck that your retirement income plan will remain on track.
DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?
Send an email to firstname.lastname@example.org with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.
Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.