More income drawdown products will start charging installation or set up fees after the A-day changes come into effect, claims a new report by Defaqto.
At the moment 25% of income drawdown products charge installation fees, also known as set up fees in self-invested personal pensions (Sipp), with the level ranging from one-off amounts to percentages of the fund for set periods. The research from Defaqto predicts this amount will increase as many organisations adapt to the A-day rules.
According to the report, Income Drawdown in the UK, annual management charges are the main pension product fee levied by providers. with many products designed on a nil commission basis with commissions built in via an increase to the charge or by a reduction in the allocation rate. The research shows these charges range from 0.49% to 1.25% and above.
Defaqto suggests another alternative, claiming greater clarity for consumers could be achieved if firms switched to Total Expenses Ratio for each fund. Although the report urges advisers to take advantage of the opportunities A-day will offer and the increased flexibility it will bring, it also issues a warning claiming the whole industry has a “huge responsibility” to enhance education about income drawdown products to avoid the possibility of a “mis-selling scandal” in the future.
Matt Ward, head of pensions at Defaqto and author of the report, claims the move to installation fees could be explained by insurance companies attempting to make a seamless link between the insured and self-invested components of a product by adopting a traditional Sipp charging structure across the whole proposition.
He adds: “An installation fee, or set up fee, may become more prevalent. Recently installation fees have become an acceptable method for the payment of commission within the product charging structure. The added income flexibility will mean that more people will want to know what the correct solution is for them, creating a business opportunity for advisers.”
But John Lawson, head of pensions policy at Standard Life, says: “Unless the charges are of a significant amount, I don’t think it is really here or there how you apply them. The key in this business is service, and charges are pretty much immaterial. There is very little difference in the charges between providers as there is no bonus for being the cheapest in this game, instead it is the service you provide that is most important.”
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