Drawdown  

Charge cap could see plug pulled on non-advised drawdown

Charge cap could see plug pulled on non-advised drawdown

The regulator's suggestion of introducing a charge cap on non-advised drawdown could lead providers to stop offering these services all together, warns Steven Cameron.

Responding to the Financial Conduct Authority (FCA) consultation on the Retirement Outcomes Review interim report, published in July, Aegon’s pension director, Mr Cameron, explained that providers might not be able to cover their costs if such a charge is introduced.

Noting a significant spike in the use of drawdown products, the regulator said it was considering the introduction of “default investment pathways”, prices for which would be capped at a certain level.

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This cap would be similar to the one that is already applied to individuals under auto-enrolment in a default fund, of 0.75 per cent a year.

Mr Cameron told FTAdviser that the regulator wants to make sure that savers are getting value for money when going into drawdown and they are not getting financial advice.

Mr Cameron said: "On the surface, it is not unreasonable, but in the workplace default funds charge cap we have employers who pick a particular scheme, which might have thousand members in that scheme, and because of that economy of scale it is easier to keep your costs below a cap on charges."

However, in drawdown, the reality is very different.

He said: "First of all, an individual that is considering taking income out of his pension is making an active decision, they are not going into a default decision.

“This is a charge only for an individual, so you do not have the economies of scale any longer.

“And if someone goes into drawdown, chances are they will start taking money out of those funds, and you might think they are not going to invest for a long-term period.”

All of these conditions make it much harder for the provider to cover its costs in whatever charge cap the government determines, he added.

Mr Cameron said that the charge cap value is still unknown.

However, regardless of the value, “providers need to look at that number and consider if they can offer this product and cover its costs”.

“Some will conclude that they cannot,” he said.

Mr Cameron believes that this charge will reduce the availability of non-advised drawdown, as some of them will simply refuse to provide this service.

Other industry bodies have also replied to the FCA consultation.

The Tax Incentivised Savings Association (Tisa) agrees with an introduction of a charge cap on drawdown.

However, as costs are greater than for accumulation, the cap may need to be higher than 0.75 per cent.

The Pensions and Lifetime Savings Association (PLSA), on the other hand, said that price regulation is not the right tool at this time, for two reasons.

First, “aligning product level governance with the interests of members should achieve a similar outcome,” it said.

“Second, the products we think defined contribution dependent retirees will need do not exist yet. It is therefore impossible to suggest a maximum acceptable price,” it concluded.