Stark variation in investment pathway charges and allocations

Stark variation in investment pathway charges and allocations

Pension savers who opt for drawdown face stark variations in investment pathway charges and asset allocation, according to research by consultancy LCP.

Charges levied by pension providers ranged from Scottish Widows’ 0.39 per cent to PensionBee’s 0.93 per cent for those going into drawdown, LCP found.

Meanwhile allocation to equities varied between Aviva's 27 per cent and PensionBee's 60 per cent.

Of the eight providers listed on the Money and Pensions Service comparison site in February 2021 as offering pathway three - or drawdown - the average charge quoted for a £100,000 pot was 0.64 per cent in one year.

The investment pathways came into being last month after the Financial Conduct Authority became increasingly concerned about non-advised retirees “sleepwalking” into having their money invested in very low-return cash funds.

There are four pathways: one aimed at those who want a guaranteed income, one aimed at those who have no plans to touch their savings, one aimed at those who want to take out all their money and one aimed at those who want to use their money to take out a long-term income.

It was this last pathway - and the companies offering products to savers seeking to follow it - which LCP focused its research on.

The consultancy said it was concerned a low allocation to equities would produce poor outcomes over a long retirement and that the heavily equity-based products might struggle to produce a regular income.

 £100k investment
Providers of investment pathway threeFirst year charge%
Hargreaves Lansdown£7520.75%
Interactive Investor£4850.49%
Scottish Widows£3930.39%
Standard Life£7320.73%
Average 0.64%

Dan Mikulskis, a partner at LCP, said: “Freedom to choose what to do with your pension pot is a good thing, but too many people are at risk of getting poor outcomes. The new investment pathways are welcome where they have helped to put downward pressure on charges, and could help steer consumers towards the right product.

"But our research has shown that different providers vary hugely both in what they will charge and in the product they will offer to the same individual.

“Savers need to look under the bonnet to see how their money will be invested before they choose where to save, and they need to avoid the risk of investing too cautiously given that retirement can easily last for several decades."

Responding to the findings, Nathan Long, senior analyst at Hargreaves Lansdown, said the company had, where possible, opted for a passive approach across the pathways to keep costs low.

He said: "Investing for income is difficult with a passive strategy though, so for [the drawdown pathway] we’ve chosen an actively managed approach meaning the charges for this pathway are higher than the others.

"We’ve adopted a multi-asset approach that results in just over 50 per cent in equities, and also includes bonds and alternative assets – this provides a good potential for income and capital growth without an excessive level of risk."

Ruth Gillbe is a reporter at FTAdviser's sister publication Pensions Expert