Drawdown charges ‘must be simplified’ to avoid FCA crack down

It is impossible to compare different providers' drawdown costs because of the variety of charging structures and types of fees, Holly Mackay has said. Carmen Reichman finds out more...

Providers need to simplify drawdown charges or the regulator will intervene, founder of The Platforum and Boring Money Holly Mackay has said.

Mackay said she found it impossible to compare the cost of drawdown of different providers because of the variety of charging structures and types of fees.

She said if providers fail to act to streamline their charges soon the regulator will step in and force them to do so, leaving no further “wiggle room”.

Drawdown became a more popular retirement choice following the implementation of pensions freedom and choice in April, which allowed all defined contribution savers unfettered access to their pots from age 55, subject to normal taxation levels.

People who would have previously had to opt for annuities switched to drawdown products in high numbers, according to data published by the Association of British Insurers (ABI) in September.

The ABI found drawdown purchases had overtaken annuity sales as £1.3bn had been invested in 19,600 the products alongside 17,800 annuities with a total value of £990m.

Mackay said her recent consumer research confirmed levels of engagement and understanding of retirement products were still low. Fuelling the problem was the opaqueness of pricing of retirement products, she said.

The Financial Conduct Authority (FCA) already clamped down on the annuity market in its retirement income review, blaming providers’ sales practices for preventing an effective shopping around process.

Consumer champion Which? later urged the FCA to take action to simplify drawdown charges in July, which it said were confusing to consumers.

Speaking at a BlackRock roundtable on 22 September Mackay said: “There is a real challenge here for drawdown providers, if they don’t make [charges] clear what we will see is what happened in the platform pricing arena where the regulator came and [intervened].

“The regulator will do what they did in the Australian market, [force providers to] give people a price, [ensure there is] no wiggle room.

“All I hear from providers are excuses and no solutions.”

She added: “It’s a lot more transparent than annuities have ever been. The info is all there, it’s just knowing what to do with it all.”

But Intelligent Pensions managing director Steve Patterson said price was not the problem in the drawdown market as consumers were generally more worried about functionality and service such as income payment processing.

“I don’t think cost is a big problem. Finding out who is the most expensive isn’t really the issue. Functionality is more important. The asset allocation strategy, the ability to do the look-ahead, the ‘what if’ scenarios, they are more important than saving 20bps on the cost,” he said.

Mackay retorted: “I agree it’s not about 10 bps here or there but I do get cross with the industry when they preach it’s about value not price and they don’t enable [comparison].

“Price is a factor of value and you’ve got to tell people what that is to help them make that decision themselves.”