Transfers of plans already in drawdown have been on the rise, as shown by data from Origo in the chart below. The number though remains small, relative to the total number of drawdown pension plans that are in existence following pension freedom.
When to shop around
For most goods you’re best to shop around before you buy them, but it’s not quite that straightforward with drawdown.
The most recent data from the FCA found that 64% of people going into drawdown only took their tax free cash and so were delaying drawing any income until a later date. Analysis of Hargreaves Lansdown drawdown clients tells a similar story with only just over half of people choosing drawdown since the beginning of 2014 actually going on to take any income.
Taking only the lump sum means you are effectively still trying to grow your pension, so there’s not really a need to shop around for a new pension at this point. It’s once you start spending your pension, by taking an income, that the choice of provider needs a closer look. Balancing up the choice of investments, the ease of using the service, the information available and the access to help with the costs that you pay will help you make sure you’ve got the right provider for you.
Things may get better soon as the Money and Pensions Service is in the process of developing a tool to help shopping around for a drawdown provider a whole lot easier.
Nathan Long, a senior analyst at investment specialists Hargeaves Lansdown, explained the need for a considered approach: ‘Shopping around becomes most important when you start drawing income from your pension plan, but we know very few people choose a new pension provider when entering drawdown without advice.
There are over a million drawdown pension plans, but the ability to transfer between providers remains a well kept secret. Only a handful of people are transferring their policies every year, which is hardly surprising as most people don’t know it’s even an option.
Drawdown investors should balance the choice of investments, ease of use, availability of information, access to help and the charges they’re paying to make sure they’re with the right provider. Navigating the complexities of drawdown isn’t straightforward, so a service that makes it easy to manage your money and reguarly review your plans is crucial.’
How to review your drawdown plan
We’ve got a ten point plan for reviewing your drawdown pension to make sure you stay in control of your retirement plans:
- Review your objective – make sure your plans haven’t changed. Are you aiming to draw no income, draw sustainably for the remainder of your life, or are you trying to deliberately exhaust your pension sooner?
- Review the sustainability of your income withdrawals – re-check how long your pension will last based on the value, expected returns and how long it might have to last. Most pension schemes will have a simple way of checking this.
- Check how your pension investments are performing – compare performance to the average of similar funds, this should be shown on the fund factsheets. Read up on what investment brokers have to say about the funds you have.
- Check relative cost of investments – how much are you paying to invest? Cheapest isn’t necessarily best, but make sure you know what you’re paying for the type of funds you’ve got.
- Check investments are still right for your objectives – check the investments you hold are fit for purpose. The types of investments you choose for growing your pension are likely to be different to those you hold if you’re drawing an income.
- Rebalance your investments – if you’re holding several different investments in retirement they’ll have grown at different rates and so may be out of kilter. Make sure the balance you want is still what you’ve got.
- Get a revised annuity quote – Check what an annuity might pay you, and make sure you plug in all the details of your health. As you get older, you normally get a better pay out. Plus annuity rates vary with changes in Government bond prices and how long we’re expected to live. An annuity purchase doesn’t need to be all or nothing, you could use just part of your pension.
- Review your cash emergency fund – everyone should have at least 3-6 months’ worth of expenses held as cash, plus an amount to cover any spending from capital in the next 5 years. If you’re only drawing the income from your investments add an additional years’ worth of income, but make that 2-3 years if you’re drawing down more aggressively.
- Monitor your pension – this won’t make you immune to poor investment returns, but logging in every 3 months should avoid most nasty surprises.
- Review your beneficiaries – review who you’ve told your pension provider that you’d like to benefit if you die. This isn’t binding, but gives a huge steer for the trustees of the pension. It’s also worth considering setting up a power of attorney so someone can look after your affairs if you can’t. This is particularly relevant for drawdown as it can be managed until late in life and one in three of us is expected to develop dementia.
How to transfer
If the balance of investment choice, ease of use, available information, access to help and costs leaves you feeling short changed, it could be time to look for another provider. Once you’ve settled on a new provider a transfer should be pretty straight forward. Contact the new provider and they will help you complete any paperwork, it may even be possible to apply online.
About the Author / Peter McGahan
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
