Since Pensions Freedom Day on 6 April last year, the government and FCA have been monitoring the retirement market with increasing intensity with a view to flushing out and stamping on any undesirable, unintended consequences of this seismic change in the at-retirement market.
Until recently much of the attention has focused on the volume of over-55-year-olds cashing out completely and levels of access to advice (or guidance). In December, there was a detectable switch of focus to the new decumulation option of choice – income drawdown.
The FCA’s desire to know more about how income drawdown products are being sold and operated, and what charges are passed onto policy holders in drawdown, is understandable when you consider the speed of growth of this market as annuity sales have waned.
The latest Association of British Insurers figures report that 19,600 drawdown contracts were sold in Q2 2015, worth a total of £1.3bn – up from 11,500 contracts in Q1 2015. Drawdown sales had been much lower pre-Freedom Day in Q1 2014 at 6,700 contracts. So the market is currently growing both by number of contracts and value at a rate of more than 50 per cent a year.
The main worry for the regulator is that ‘internal sales’, as a percentage of the whole market, is creeping up, and now stands at 42 per cent of all drawdown sales. This means that nearly half of all purchasers of drawdown contracts are failing to shop around for a drawdown offering. The second most significant concern for the FCA has to be the lack of consistency in levels of charges by drawdown providers.
Because my firm provides administration capability for many of these contracts, we are able to see the profusion of charges which are currently being levied by drawdown contract providers. A quick investigation found 10 different charges which providers are using right now. These are, in no particular order:
■ a transfer out charge for moving from one contract to another,
■ a transfer out charge to UK-based schemes,
■ a transfer out charge to overseas schemes,
■ an annuity purchase charge,
■ a tax-free cash charge (in drawdown a member might be charged several of these as they draw down tax-free cash in stages),
■ an income charge (essentially an annual drawdown use fee),
■ a crystallisation charge (as monies are drawn down),
■ a pot depreciation charge (taken just before the drawdown balance goes to zero),
■ a review charge (for those in capped drawdown where pre-April 2015 drawdown scheme members opting to be capped will remain if they do not exceed their stipulated maximum income allowance), and
■ a death benefit charge.
These are before you get into ‘additional designated charges’ often associated with phased drawdown.
In addition, there is little consistency in terms of amounts charged. In a study of transfer out fees we conducted a little while ago, based on a sample of 54 Sipp providers, we found fee amounts varied enormously. Some charged more than £500, others charged nothing at all. The average was £161.70 per transfer out.
Very few providers have rationalised the relationship of these charges to the value of the assets held or amounts withdrawn over a given period for the purposes of comparison or illustration. However, this is what the FCA may push for once it has gathered the results of its survey on drawdown charges in mid-February, published its findings and acted on them.
Product providers may well have good reason for specific charges. Forcing uniformity as and reductions of charges could stifle innovation and restrict providers’ ability to differentiate their offerings. But they will need to make a strong case for retaining specific charges, and they may need to volunteer more information about precisely what each charge pays for.
Natanje Holt is managing director of Dunstan Thomas