Cap pension drawdown charges, Labour says

Labour is calling for tough new price caps to protect savers from being ripped off from April next year when new pension freedoms will enable the over-55s for the first time to take their pension pots and do whatever they like with the money.

Shadow pensions minister Gregg McClymont wants strict price controls on the new wave of ‘drawdown’ products currently being created by the financial services industry. Drawdown is being widely promoted as the replacement for annuities, allowing pension savers to leave their cash invested in a mix of shares, bonds and equities, and then take a gradual income from the money during retirement.

The goverment has already introduced a cap on charges of 0.75% a year on workplace pension schemes from April 2015, but left drawdown plans out of the regime. Labour wants a cap on drawdown products of no more than 0.75% but possibly 0.5% to protect the anticipated 320,000 people expected to use some sort of drawdown from next year.

McClymont said: “Labour welcomed the new pension flexibilities announced in the budget, but we are concerned that the government has not thought through the risks of rip-off charges being taken from the savings of hardworking people.”

Sales of annuities have already halved ahead of the new pensions freedoms next April, but the alternatives available are still the subject of controversy. Nest, the pension provider set up by the government to handle “auto enrolment” workplace pension schemes today launches a consultation calling for the industry to produce drawdown products that meet the challenges of low and moderate earners. “There are currently no suitable solutions for the vast majority of savers on moderate earnings,” it said.

Research by Nest found that savers are looking for protection from inflation during retirement, a guaranteed income until death, while wanting to avoid stock market volatility. Nest chief investment officer Mark Fawcett said guarantees are likely to be too expensive for most savers, but that the organisation is exploring insurance-based concepts common in the US to help protect pensioners from market volatility and from the risk that their money will run out.

“The solutions we as an industry develop over the next few years could determine the lives of millions of people in old age. We absolutely cannot afford to fail consumers who will increasingly have to make choices that will have fundamental impacts on their lifestyles in retirement. Leaving their retirements to chance is not an option,” said Fawcett.