Auto-enrolment focus on pension fund charges misses the bigger picture
by Dr. Ros Altmann
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There are no controls on charges people forced to pay when buying their actual pension
Far more money can be lost on annuitisation than saving 0.25% in fees
0.25% charge on £30,000 fund is £75pa but customers lose £600-£1000 when buying their annuity at retirement with no advice
Auto-enrolment needs to ensure pensions are good value: There has been significant debate about capping fees and charges on auto-enrolment pension funds and estimates that people are losing chunks of their pension fund in extra fees. It is clearly in the interests of customers to ensure fees are reasonable and, of course, paying lower fees will help ensure a larger future pension fund. However this debate is missing a most essential piece of the pensions puzzle. When people buy a pension income, they are often losing far more of their fund than the savings they make from the current proposed charge caps.
A 0.25% lower annual charge for a £30,000 pension fund equates to £75 saved each year, but when buying an annuity they often lose over £1,000: A 0.25% charge on a £30,000 pension fund is just £75. The smaller the fund, the less the 0.25% charge will be but that is where all the focus on controlling pension charges has been. However, when they come to buy an annuity with a £30,000 fund, they will often have to pay over £1000 as companies commonly charge between 2% and 3.5% of the fund to sell them an annuity and there are no controls on those costs at all. It seems the charges debate has lost sight of the wood for the trees.
Auto-enrolment is underway but has failed to focus on the actual pensions: It is astonishing that we are well into the process of pension auto-enrolment and yet the reform agenda has not really looked at the value for money of the actual pension that people will receive in retirement. Focussing on lowering charges while building up the pension fund is clearly important, but even if people have a larger pension fund at retirement, they could lose much more if they do the wrong thing when deciding how and when to buy their pension income. It is the annuity that is the pension, yet auto-enrolment has failed to take account of ensuring customer value at the vital stage of pension saving.
No controls or caps on fees for annuities: Buying an annuity is an irreversible purchase, customers usually only do it once in their lives, yet they receive no advice even though they pay hundreds of pounds in ‘commission’. There are no controls on the amount of money that a provider can force people to pay when buying an annuity. There are also no controls on the rate that people must be offered when buying an annuity. Annuity rates have fallen so low as gilt yields were depressed by QE and there are no requirements to ensure fair value for the customer in annuity rates.
How do customers lose out on charges?
Buying direct without shopping around costs 2%-3.5% of the fund i.e. £600 – £1000 from a £30,000 pension fund for doing nothing: Those who just buy an annuity from their existing provider have money taken out of their pension fund as ‘commission’ even if they receive no advice. The money is just pocketed by the provider or broker. Customers will often be buying the wrong type of annuity (for example single life annuities leave nothing for widows when their husbands die) at a very poor rate. For a £30,000 pension fund, the provider will take £600 – £1000 but not have to provide any advice for this money.
Buying direct from an annuity broker also costs £600-£1000 or more out of a £30,000 pension fund for finding better rate, but may still be wrong product: Shopping around for an annuity with an annuity broking service is clearly better for the customer than just staying with their pension company but will still cost significant sums even though it is a do-it-yourself service which is not covered by regulatory protection, may not offer annuities from the best provider at the time and will not ensure people buy the right type of annuity at the right time.
Buying from an independent whole of market adviser can cost around £700 for a £30,000 fund for full advice: Many financial advisers will advise clients on annuities for less than the cost of non-advised or direct-purchase. The customer will then be paying for the service they need, rather than paying without receiving the best chance of optimising the value of their pension fund. They will be covered by regulatory protection and have access to all the providers in the market, rather than just those on a broker’s panel.
Pensions are still not working in the customer interest – advice costs less than d-i-y!: So the cost of the independent, whole of market advice which people actually need is often less than the cost of buying the wrong annuity at the wrong time at the wrong rate. The focus on ‘shopping around’ for the best rate is not enough to ensure good value pensions. There need to be controls on the charges and fees that are paid when converting pension funds into pension income. Unfortunately, the effect of the RDR means that regulatory bias is driving people towards non-advised services which can cost more than the advice which they really need. It is time to sort out this end of the auto-enrolment pension process too.
Dr. Ros Altmann
11 November 2013