Campaign for Clear Pension Charges
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Pension investors risk overpaying tens of thousands of pounds in fees as “shameful” industry practices make it hard for customers to identify and compare charges.
In recent years more than half a million over-55s have shifted their retirement savings into stock market-linked “drawdown” pension accounts, which they manage themselves or with the help of an adviser.
However, opaque and complex fee structures make it extremely difficult for investors to work out what they might pay, or to compare different providers.
Analysis commissioned by the Financial Times has found that typical fees for investing a £1m pension fund into drawdown will cost between 2 and 2.5 per cent of your pot per year for a fully advised service, and between 0.5 and 1.25 per cent on a DIY platform.
To illustrate how the percentage charges on a £1m investment could add up over 25 years, consumers could theoretically pay a total of £346,000 to £815,000 in fees depending on whether they managed their pot themselves, or hired an adviser to do it for them (see methodology).
Getting to the bottom of these estimates took Holly Mackay, founder of Boring Money, an independent investment website for consumers, and a finance professional with 20 years’ investment experience, weeks to complete due to the “mind-bending” array of charges.
Her conclusion is that ordinary pension investors will have a “near impossible” task to compare all the options open to them for investing their retirement cash.
The Financial Conduct Authority (FCA) has rules in place to ensure firms managing your investments must be clear about their fees, but the difficulty of compiling the data below suggest these do not go far enough.
As the rules stand, there is no direct requirement for firms to publish their fees online — and the analysis found that two large advisory firms out of the five analysed in detail failed to do so.
FT Money and Boring Money believe the UK’s millions of retirement savers deserve better. Today, we are launching a campaign for Clearer Pension Charges. Supported by a former pensions ministers and a host of leading industry figures, we are calling on investment platforms and advisory firms to provide greater transparency for consumers.
Every advice firm and platform should publish details of all fees online, and make these easy to find with a prominent homepage link
All firms should have a calculator on their website which provides an indicative amount of charges for any prospective customer to personalise costs
Companies should make it easier for consumers to compare charges and shop around.
The analysis below compares typical charges that someone with a £1m self invested personal pension (Sipp) could expect to pay if they used the drawdown service provided by five separate DIY platforms and five fully advised services.
As well as comparing costs, we also considered the ease or difficulty of finding information about charges online, highlighting the “best practices” firms are using to communicate this information to investors.
“I have been working with investment and pension platforms for over 20 years but I estimate it took me a total of 30 hours, numerous emails and phone calls to the firms in question, plus the assistance of a maths graduate to help me work out these charges,” says Ms Mackay.
“It is shameful and inexcusable that the industry still makes it so hard for customers to identify and compare charges.”
Read on to find out how charges compare, the conclusions of the research and how you can show your support for the FT’s Clear Pension Charges campaign.
How clear are pension charges?
Boring Money aimed to work out how each firm’s investment charges would impact a £1m pension fund in percentage terms. It also compared the theoretical impact of these charges on a £1m investment over 25 years, assuming no withdrawals were made (see methodology box).
Boring Money’s methodology
Boring Money’s analysis compared the cost of investing a £1m self-invested personal pension (Sipp) using drawdown services provided by 10 DIY investment platforms and advised services.
The analysis of costs and charges was based on information firms displayed on their websites, and in one instance, an customer’s statement of charges, supplemented with phone calls and emails to the firms in question.
Where the advice fees were not specified, Boring Money assumed initial advice fees of 1.5 per cent and ongoing advice fees of 0.75 per cent.
Unless specified to the contrary, Boring Money assumed portfolios were 100 per cent invested in funds with an ongoing charges fee (OCF) of 0.75 per cent.
In the analysis of the impact of investment charges on a £1m portfolio over 25 years, Boring Money assumed 5 per cent annual returns with no withdrawals made over the period. As some advisory firms have high initial charges that then fall, the percentage charges are modelled on the portfolio valuation after 10 years.
In practice, when a £1m pension pot is moved into drawdown, most investors will take their 25 per cent tax-free cash before starting to draw an income from their funds. However, for illustrative purposes, Boring Money modelled the impact of charges on the full £1m amount.
It looked at drawdown plans provided by five DIY investment platforms, where you are in control of your pension, and five financial advisory firms, where you pay a professional to look after your retirement fund. Both sets of businesses have seen huge investment inflows since “pension freedoms” liberated the retirement savings market five years ago.
To assess how clear these firms were about their charges, Boring Money considered how fees were disclosed, the clarity of information presented and how easy it was for consumers to find.
The FCA expects charges to be clear, but it does not set rules about how charging structures should be presented.
Why do charges matter?
Over time, large investment management charges can dramatically eat into your pension savings, so it is important to make an informed decision about where and how you invest your cash. Consumers can only do this when firms are upfront about their fees.
For long-term investments such as pensions, the impact of seemingly small percentage charges over time is staggering.
For example, the difference between a 2 per cent annual fee and a 0.9 per cent fee on a £150,000 pension pot could be £64,000 over 20 years.
Comparing drawdown charges between providers is incredibly difficult due to the array of different charging structures and mixed approaches to disclosure — something that has already attracted the ire of MPs.
Of course, price is not the only thing to consider. It can be worth paying higher fees for a qualified professional adviser if you get a better service or bigger returns on your investment.
But to know whether you are getting good value, you need to know how much you are paying. Only then can consumers satisfy themselves that they’re getting the best deal on the level of service or investment performance they expect.
What prevents consumers from shopping around?
If you were shopping around for other financial products like a mortgage or an insurance policy, you might use a price comparison site to get a better idea of your options.
But pensions are complex products to compare, and layering on the cost of using an advisory service makes it much harder for consumers to make an informed choice.
Currently, there are no online tools available for investors to compare the costs of different drawdown services so shopping around is time-intensive — and unsurprisingly, most consumers don’t bother.
According to FCA data, more than half of customers moving into drawdown are opening accounts with the same company where they built their pension savings.
In general, the DIY platforms were more upfront about putting their charges online than financial advisers, but not all made it easy to find this information or how to apply it to a customer’s circumstances.
Only one of the 10 firms analysed provided prospective customers with an easy-to-use online investment calculator which allowed them to personalise their fees.
“There is also a culture in some areas of the financial planning industry that fees should not be made public on websites, as this encourages customers to focus on price and not on value,” says Ms Mackay.
“I totally disagree with this — only once we have defined price can we then move on to consider value.”
During the analysis, it became apparent that some firms were much better than others at helping consumers to understand the impact of charges and what they were getting for their money.
The DIY platforms
Boring Money’s analysis found that those with a sizeable pension who choose the DIY route could expect charges from 0.5 per cent a year (all passive investments, and taking regular income payments) to 1.25 per cent (actively managed funds and slightly less predictable withdrawals).
Tiered charges mean these percentages will vary over the years as your investments grow. In the table above, Boring Money has used a snapshot of percentage charges at year 10 for ease of comparison.
Although the differences between the platforms appear slight when expressed in percentage terms, the impact of these charges on a £1m investment could add up to as much as £60,000 over 25 years.
On this 25-year assumption, Interactive Investor, the UK’s second-biggest consumer investment platform, produced the lowest fees in the sample group, of £346,000 compared with its larger rival Hargreaves Lansdown at £417,000.
Ms Mackay says that providers who offer fixed fees are substantially cheaper for large investment portfolios than the ad valorem method, which charges a percentage of the funds invested.
Interactive Investor says: “Our fixed flat fee, in pounds and pence, means that as customers’ assets grow in size over the years, the amount we charge stays the same each year.”
Hargreaves Lansdown says Boring Money’s analysis does not reflect the discounts applied to its “Wealth 50” funds, which averaged 30 per cent.
HL also says it caps charges at £200 a year for ETFs and investment trusts, whereas the FT’s analysis was modelled on funds.
“We have removed nine fees in the last six months and now have a very simple and transparent fee structure, where online clients pay HL the service fee plus the cost of any share deals and nothing more,” says Danny Cox, head of communications at Hargreaves.
AJ Bell says: “It is right that investors should look at total charges. However, this scenario includes a number of assumptions that do not reflect how customers use our platform.
“On average, our customers hold 24 per cent of their investment in funds rather than the 100 per cent assumed here. Investors can reduce [charges] significantly by opting for a lower cost fund or a different investment option.”
The Share Centre says: “The charges clearly evidence the impact a flat fee structure has, how wealth can easily accumulate and how the customer benefits over the longer term from the reassurance and knowledge in what they are paying, unlike those providers who operate percentage-based arrangements.”
How did DIY platforms rate on transparency?
All of the DIY firms analysed provided detailed information about their charges on their websites, but some made it far easier to find than others.
Only three of the five — Interactive Investor, AJ Bell and Fidelity — had an easy-to-find link to their fees on the top line navigation of their homepages. The Share Centre was marked down for not providing a prominent link to charges, and had multiple options and menus of charges which Ms Mackay says are confusing to navigate.
“We are always mindful of how charges are presented and understood by current and prospective investors, reviewing any feedback we receive,” says Andy Parsons, head of investments and product proposition at The Share Centre.
Fidelity was rated the highest of all DIY platforms when it came to clarity of its fees. “Fidelity has a single, all-inclusive charge and the website clearly explains there are no additional fees for flexible drawdown or other activities,” Ms Mackay says.
While Fidelity and Hargreaves were the most transparent, she said they could make things even clearer by providing an online calculator for customers to work out their own personalised cost illustrations.
She adds: “I think it’s unacceptable for firms not to have a clear link to charges from the main menus of their websites, and a charges calculator to show people an estimation of what they would pay.”
What about financial advisers?
When you throw advisory fees into the mix, working out the impact of charges on your pension investments becomes much more difficult.
Customers who need a helping hand to manage their pension investments have a much tougher time getting to grips with costs as not all of the firms analysed disclosed fee information on their websites.
However, the analysis showed the differences in fees and assumed investment outcomes was more dramatic.
As a rule of thumb, all of the advised services charged ongoing fees of between 2 and 2.5 per cent for advice and investment management on pensions drawdown products.
Again, when you take these seemingly small percentages and apply them to a £1m investment over 25 years, the charges really mount up.
At Schroders Personal Wealth, backed by Schroders and Lloyds Banking Group, the cumulative charges could total £664,000 over that period, according to Boring Money’s analysis — the lowest of the five advised services compared.
In contrast, charges levied by Succession Wealth, the UK’s leading independent wealth management and financial planning business, could total about £815,000.
Assuming no withdrawals were made over the 25-year period and annual growth of 5 per cent, the Schroders’ investor would be left with £2.17m and the Succession investor £1.9m — a difference of £270,000.
Succession Wealth says: “As we have not had sight of the calculations undertaken, it is not possible for us to verify the charges over the 25 year period.
“We deliver value to our clients through the experience and expertise of our financial planners and our overall lifetime client experience.”
Brewin Dolphin, which was ranked second highest for charges, says: “In this scenario, our client would have amassed about £2m after fees which also include third party fund charges. We help clients achieve their financial goals based on a personalised, ongoing service with the client in this instance benefiting from financial advice throughout the 25 years including the creation and ongoing management of a bespoke portfolio and how best to structure their finances for the long-term.”
Ms Mackay says that from an overall cost perspective, the analysis shows how larger groups are able to drive economies of scale from managing the investments, the administration and the advice under one roof, and then bundling these costs together.
“Schroders Personal Wealth is not a fully discretionary service, and its model doesn’t enable such a tailored approach as some of the other advisory firms, which is why it’s a little cheaper,” she adds.
When the fees will be applied is something else investors need to consider. Ms Mackay found that the costs of advised services on a £1m portfolio in the first year ranged from £35,000 to £70,000.
“St James’s Place had hefty initial fees in year one and then lower fees for six years, but when you look at the cost of holding a £1m portfolio over 25 years, the impact of the initial charges is lessened, so they appear more competitive over the longer period.”
How did the advisory firms score on transparency?
Comparing advice firms was a challenge as some firms were much more upfront about their fees than others.
Ms Mackay singles out Schroders Personal Wealth for providing customers with an easy-to-find online calculator to help them personalise their costs, describing this as “best practice”.
Support for our campaign
Pension experts have come out in support for the Campaign for Clear Pension Charges, agreeing that investors should be treated fairly, with clear and transparent explanations of the charges they pay.
“Hiding charges from customers and failing to properly disclose how much the customer will have to pay for the funds they are using should no longer be tolerated,” said Baroness Altmann, a former pensions minister.
Mick McAteer, a former board member of the FCA and co-director of the Financial Inclusion Centre, a think-tank, said: “High charges mean that consumers have to save more over their lifetime to provide the same income in retirement.
“Clearly, if an expert finds it so hard to work out the level and the impact of charges, it makes a mockery of the idea of even the most confident consumers being able to make informed choices.”
Gina Miller, who heads the True and Fair Campaign for clearer investment charges, said: “Since 2012, our campaign has been calling for pension savers and investors to be granted the basic consumer rights of knowing how what they are paying and what they are buying. The immoral, anti-consumer way that UK pension savers and investors continue to be treated is a shameful stain on our industry.”
Nick Smith, a Welsh Labour MP, who campaigns for higher standards in the investment industry, said: “The way the pensions market is run at the moment just is not putting the consumer first. There needs to be far more price transparency and a straightforward calculator that lets people know exactly how charges will impact the returns they get would go a long way to make a very opaque system clearer for consumers.”
Readers can show their support for the Clear Pension Charges campaign by getting in touch with their views on the drawdown market, and how easy or difficult it has been to shop around for a provider.
Email us: firstname.lastname@example.org
Tweet us: @FTMoney or use the hashtag #ClearPensionCharges
Write to us: FT Money, Bracken House, 1 Friday Street, London EC4M 9BT
Customers simply enter the amount they want to invest, and indicative costs are immediately broken down. For a £1m investment, the calculator generated a one-off advice fee of £17,500, an ongoing advice fee of £542 per month and investment charges of £916.67 per month, assuming a 1.1 per cent charge comprised of the fund manager’s fees, discretionary management fees and platform fees).
This approach was in stark contrast to two advisers — Succession and Tilney, a UK-wide financial planning firm managing £24bn of client cash — which did not disclose any fee information on their websites.
Tilney says: “We don’t publish fees on our website because these are tailored services and the costs will therefore be dependent on the complexity of work required for a client. Our approach is to meet with a potential client, get an understanding of their circumstances and what they wish to achieve, identify how we think we can help and then set out a fully costed proposal. This is very typical for professional services firms, including lawyers and accountants.”
Succession Wealth says: “The client in this research will have a range of personal, tailored needs where the fee applied for the solutions to meet these needs will actually vary according to that which offers the outcome best suited to the client's specific circumstances.”
St James’s Place did disclose its fees on its website, but Ms Mackay comments that the array of charges and how to apply them made it “head-bangingly confusing to work out what was what”.
SJP says: “We are committed to ensuring our charges are communicated clearly and they are set out on our website and in materials provided to clients, but most importantly, during the regular face-to-face meetings partners have with their clients, which is at the very heart of what we do.”
Ms Mackay strongly disapproved of firms that did not publish their fees online.
“It’s not that hard to model a scenario and illustrate this as an approximation based on various assumptions,” she says. “But firms are more worried about looking expensive compared to peers than they are about looking transparent to their customers.”
The FT shared the findings of the research with the FCA, asking if more needed to be done to improve transparency on fees for consumers.
The regulator says that transparent charges are a vital part of a competitive pensions market and it wanted to make sure drawdown charges were clear and comparable for consumers.
“We have introduced new rules requiring providers to highlight first year charges when a customer enters drawdown, or decides to take an income from their pension for the first time,” the FCA says.
“They will also be required to provide annual updates on the actual cost to the consumer. These charges will need to be expressed in a single pounds and pence figure.”
When consumers are shopping around for a drawdown provider, they must be able to understand and compare charges to work out the best value option. Five years after pension freedoms were granted, it is high time for the industry to take action.
What are the FCA rules on charge disclosure for advisers and DIY firms
The Financial Conduct Authority has different rules on charge disclosure for pension providers who sell directly to customers and for advisers who look after clients’ cash. As they are drafted, there is no direct requirement to publish fees online.
For advisers, the FCA says: “Whatever the charge, it must be clear to the consumer. You must disclose your charging structure to a client upfront and in writing, so they have the information in good time before the advice process starts. You must also agree and disclose the total charges your client will pay as soon as you know this.”
For DIY pension platforms, the FCA says: “Before accepting new business, pension providers must disclose all the charges that they expect to deduct from the pension, in a Key Features Illustration (KFI). As well as describing the nature and amount of charges, firms must show the effect of charges on what the consumer might get back and provide a statement describing how the charges reduce the effective growth rate, using illustrative assumptions. For a pension entering drawdown, the KFI will also include a projection showing when the funds might run out.”
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