Pension drawdown costs.

The charges and fees on pensions with a drawdown facility can vary considerably depending on which provider you choose.

Under pension drawdown (also called “income drawdown”) you are permitted to take money from your pension funds as and when you want to. At the same time you may leave the remainder invested whilst still in retirement.

Here are the sorts of costs you would typically pay when taking advice in setting up a drawdown pension, these fees can vary depending on your situation. We can break these costs down as follows:

• How much does a drawdown pension cost?

• Choosing the right pension drawdown product for you

• Speak to an income drawdown expert

How much does a pension drawdown cost?

The costs involved in pension drawdown are individual/pension specific.

All providers will work to different terms and the associated costs could have a big impact on how much you end up paying. Typical pension drawdown charges include (but are not limited to):

• Set-Up Fees - Typically a standard fee

• Administration Fees - Typically a standard fee but some lenders may calculate costs based on how much you have in your pension pot.

• Fee(s) on withdrawal(s) of the 25% tax-free sum - Some providers don’t charge for any withdrawals of the 25% tax-free sum, others may charge a fee (set or variable) per withdrawal

• Fee(s) on additional withdrawal(s) over  25% tax-free sum - Some providers don’t charge for any withdrawals of the 25% tax-free sum, others may charge a fee (set or variable) per withdrawal

• Income Tax charged on each additional withdrawal - Withdrawals outside the 25% will be added to any other income you have which could impact how much Income Tax you pay

• Fees for ongoing pension drawdown management - Some providers will charge a set fee, but many will charge a percentage of your pension funds    

• Transfer fee / exit charges - Typically a standard fee

You would be advised to carry out a pension charges comparison to find out which income drawdown product is best suited to you before you commit to a product.

Choosing the right pension drawdown product.

The first 25% of your pension is tax-free, irrespective of whether your fund is £40,000 or £400,000. After that HMRC consider the remaining 75% to be earned income and therefore taxable. The amount you take after the initial 25% could potentially limit how much you can pay into a pension in the future.

You should be aware that by taking any income outside of your 25% tax-free allowance could potentially put you in danger of being pushed into a higher tax bracket, as these funds will be added to any other taxable income you have.

You also should be aware of the lifetime allowance as further tax may also apply if the value of your pension savings exceeds £1,030,000 when you access the funds.

Speak to an income drawdown expert

We can arrange a free pension review for you today.

Final salary pensions - the facts

The FCA confirm that transferring out of a final salary pension is unlikely to be in the best interest of most people.

A guaranteed salary-related pension that lasts lifelong, and is unaffected by the ups and downs of markets, is likely to be the best pension for most people.

However some people will want extra flexibility or want to ensure that they can pass on some of their pension wealth for whom a transfer might be the right answer. It is vital to take, and listen to, professional financial advice before making a big decision of this sort.

FIVE REASONS WHY A PENSION TRANSFER MIGHT BE SUITABLE

1. Flexibility – instead of taking a set pension on a set date, you have much more choice about how and when you take your pension. Many people are choosing to ‘front load’ their pensions, so that they have more money when they are more fit and able to travel, or to act as a bridge until their State Pension or other pension becomes payable.

2. Tax-free cash – some Defined Benefit (DB) pension schemes may offer a poor deal if you want to convert part of your DB pension into a tax-free lump sum. Although the tax-free cash is in theory, 25% of the value of the pension, you can often be penalised more than 25% of your annual pension if you go for tax-free cash; in a Defined Contribution (DC) pension, you get exactly 25% of the pot as tax-free cash.

3. Inheritance – generous tax rules mean that if you leave behind money in a DC pension pot, it can be passed on with a favourable tax treatment, especially if you die before the age of 75. In a DB pension, while there may be (but not always) a regular pension for a widow or widower, there is unlikely to be a lump sum inheritance to children.

4. Health – If you suffer or have suffered from ill health and therefore anticipate a shorter life you might do better to transfer if this means there is a balance left in your pension fund when you die, which can be passed on. Those who live the longest get the most out of a DB pension. Please note that HM Revenue & Customs may challenge this for those who die within two years of a transfer.

5. Employer solvency – while most pensions will be paid in full, every year some sponsoring employers go bankrupt. If the DB pension scheme goes into the Pension Protection Fund (PPF), you could lose 10% if you are under pension age, and may get lower annual increases; if you have transferred out, you are not affected.

FIVE REASONS WHY A PENSION TRANSFER MAY NOT BE SUITABLE

1. Certainty - with a DB pension, you get a regular payment that lasts as long as you do. With a DC pot you face the risk of living too long and your money running out, known as the “longevity risk”.

2. Inflation - a DB pension typically has a measure of built-in protection against inflation but with a DC pot you have to manage this risk yourself, which can be expensive.

3. Investment risk - with a DC pension, you have to manage the ups and downs of the stock market and other investments: with a DB scheme, you don’t need to worry - it’s the scheme’s problem.

4. Provision for survivors - by law, DB pensions have to offer a minimum level of pension for widows/widowers, etc., whereas if you use a DC pension pot to buy an annuity, it dies with you unless you pay extra for a “joint life” annuity, as you are effectively buying two pensions from the same pot.

5. Tax - DB pensions are treated relatively favourably from the point of view of pension tax relief. Those with larger pensions could be under the lifetime limit (currently £1,030,000) inside a DB scheme, but the same benefit could be above the limit if transferred into a DC arrangement and in such cases the tax repercussions can be difficult to manage.

TIME FOR A PENSION REVIEW?

Before considering transferring your pensions, it’s essential that you receive impartial professional financial advice about your particular situation.

ACCESSING PENSION BENEFITS IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS BEFORE AND AT RETIREMENT.

Safeguarded benefits

What are safeguarded benefits and when do you need to take advice to give them up.  

The Pension Schemes Act 2015 introduced the concept of safeguarded benefits from 6 April 2015. It also placed a requirement on some individuals to take financial advice before they can give up safeguarded benefits.

Key facts.

Key facts advice on pension transfers generally must be provided by, or checked by, a Pension Transfer Specialist. If they are only checking the transfer they must check the entire process, not just the numerical analysis.

An individual with safeguarded benefits worth more than £30,000 under the scheme must take financial advice before they can convert, transfer or take them as a cash lump sum.

The transfer value analysis has been replaced with a requirement to undertake “Appropriate Pension Transfer Analysis” of the client’s options.

This includes a prescribed comparator (Transfer Value Comparator) which aims to show the cost of providing the same benefits as the Defined Benefit scheme but in a Defined Contribution scheme.

What are safeguarded benefits?

Safeguarded benefits are defined as benefits that are not money purchase or cash balance benefits. This means defined benefits, guaranteed pensions including Guaranteed Minimum Pensions (GMPs) and Guaranteed Annuity Rates (GARs).

You may be surprised by the inclusion of GARs in the above list. This is because the benefits are calculated by reference to the guarantee and not just the plan value.

When must you take advice to give up safeguarded benefits?

An individual with safeguarded benefits worth more than £30,000 under the scheme must take financial advice before they can do any of the following:

• Convert these benefits into a different form of flexible benefits under the scheme

• Transfer these benefits to another scheme to take flexible benefits

• Take a cash lump sum in respect of these benefits

You do not need to take financial advice where your benefits under the scheme are valued at £30,000 or less. Providers may not accept non-advised transfers of safeguarded benefits so you should check before submitting any transfer applications. 

Not all schemes or plans will offer all of the above options.

Income drawdown

You can get an income from your pension pot that’s adjustable. This means you get a regular income but can change it or take cash sums if you need to. 

● You get 25% of your pot as a single, tax-free cash sum

● The other 75% is invested to give you a regular but taxable income 

● You can adjust, to suit your specific needs, the income you take and when you take it

This option is also known as ‘flexi-access drawdown’. 

You will need to be involved in choosing and managing your investments, which is why previous investment experience would be beneficial. The value of your pot can go up or down. 

As not all pension providers offer this option, you can transfer your pot to another provider but you will probably have to pay a fee. 

Taxation 

The income you get from the investment is taxable. Your provider will pay you the income net of tax. 

You pay tax when you take money from your pot. This is because when you’re paying into your pension you get tax relief on your contributions. 

Example 

You have a pot of £100,000 and take a tax-free lump sum of £25,000. This leaves you with £75,000 to invest. You get an income of £3,750 a year from your investment. If you pay 20% tax you’ll get £3,000. 

If you take the 25% tax-free lump sum, you must get an adjustable income with the rest or use one of the other options . 

You can move your pot gradually – you don’t have to move it all at once. Each time you move a sum, 25% is tax free. 

If you choose this option, you can leave your money to someone when you die but they may have to pay tax on it, depending on a number of factors.

How adjustable income works 

Different investments have different risks. You pick the investments that match your attitude to risk and get a retirement income from them. You need to think about how much you take out every year and how long your money needs to last . 

A financial adviser can help you create an investment plan for your money. They can advise you on how much you can take out to make the money last as long as possible. They’ll charge you a fee for this. 

Your provider is likely to charge you fees for managing your investments and whenever you get a payment. 

If your provider collapses you’ll be covered by the Financial Services Compensation Scheme . 

Continue to pay in 

If you have more than one pension pot, you can take an adjustable income from one and continue to pay into others. However, you may have to pay tax on contributions over £4,000 a year (known as the ‘money purchase annual allowance’ (MPAA) ). 

This includes your tax relief of 20%. For example, to get a contribution of £3,000 you would only have to pay in £2,400. 

You may still be able to pay into the pot you take your adjustable income from but you won’t get tax relief on these payments. 

Financial advice 

If you’re interested in this option you might want to get financial advice first. A financial adviser can help you to compare adjustable income products and work out which is best for you. 

Scams 

Beware of pension scams contacting you unexpectedly about an investment or business opportunity that you’ve not spoken to them about before. You could lose all your money and face tax of up to 55% and extra fees. Please see out blog on scams.

Pension options at retirement

At retirement when we take our pension from a defined contribution scheme we have a number of options available to us.

• The open market option

• Tax free cash lump sum

• The frequency of payment

• Escalation in payments

• Spouses provisions

• Guarantee periods

Each of these options can be taken in conjunction with any other. However, some of the benefits will defray the initial amount of pension benefit that you would receive should you take a single life pension with no other provisions.

The Open Market Option

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

 The term OMO is now generally used to support a campaign, often led by the pensions industry and the media, to make sure people know the benefits of shopping around. The majority of people still don’t use the Open Market Option in large part because they don’t know they can or don’t realise the benefits of doing so. Retirees who don’t use the OMO and settle for the default deal offered by their pension provider, may be missing out on up to 20% more income from an annuity. This is especially important as retirees cannot change their annuity once it has been purchased.

 One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity) which pays a higher income to people who suffer from a range of health conditions – anything from asthma to a serious heart condition. There are also other products available that may suit peoples retirement needs better than the default deal offered by a pension provider. One suggestion to make the most of the Open Market Option is to speak to an independent financial adviser who will explain the different options available at retirement.

Tax Free Cash Lump Sum

At retirement you are permitted to take 25% (a quarter) of your pension fund in as a Tax-Free Cash Lump Sum. In certain circumstances it could be more than this. The Tax-Free cash can be paid by the ceding scheme or the new scheme should you take advantage of your Open Market Option. The remainder will be considered as earned income by HMRC. The amount of tax you pay will depend on your prevailing tax status at the time that you take the pension.

Frequency of Payments

Most pension providers will allow you to take your pension at different Frequencies of Payments, such as annually, quarterly and monthly, sometimes in advance or arrears. Once you have made your decision that is generally how you will continue to receive your income for the rest of your pension annuity.

Escalation in Payment

You can elect to have your pension paid to you at a flat rate for the rest of your life or have it increase in different ways, through Escalation in Payment, typically by 5%, 7.5% etc. Should you choose this option then the initial pension you receive will be significantly reduced but at least you can ensure that your pension retains some degree of inflation proofing. 

Spouse’s Provisions

Typically people will purchase a single life annuity but you can elect to provide a pension for your spouse, through a Spouse's Provision should you wish to do so. This at least ensures that should you die in the short term your spouse will continue to benefit from your pension. Spouses pensions can generally be provided at different rates as a percentage of your own, for example 33%, 50% or even 100%. As with all other pension options its best to check what the pension provider is able to offer.

Again this particular option does reduce the amount of initial pension annuity because you are effectively buying two pensions from the same amount of money.

Guarantee Periods

At outset, as with all these options you can elect to take a guarantee period against the pension. 

A Guarantee Period can be of different duration, again typically 3, 5 or 10 years. This means that the pension will be paid out to your spouse (or in the event of your spouse predeceasing  you, your estate) for the remainder of the term should you die within the guarantee period. For example if you were to take a 10 year guarantee period and then die in year 6 your spouse (or estate) would continue to receive the pension for the remaining 4 year term, after which time, (unless you had provided for a spouses pension) the pension would cease and no other payments would be made.

These options are not offered at the outset of your pension plan as you have no indication at that time what your marital status may be at the time of vesting, the prevailing rates of inflation and your need for tax free cash. Nevertheless the decisions that you make in relation to these options are of great importance both to you and your family should you have one. Moreover once you have made your decisions they cannot be unwound, there are no “U turns”. It is therefore essential that you give consideration to taking professional financial advice at this pivotal and critical time in your financial planning.