Drawdown Charges Scrutiny presents Disclosure challenge to providers
2 December 2015
FCA Income Drawdown charges
scrutiny looks set to increase disclosure requirements
says Natanje Holt, Managing Director, Dunstan
Thomas
Since Pensions Freedom Day on 6th April
2015, the Government and Financial Conduct Authority
(FCA) have been monitoring the retirement market with
increasing intensity with a view to flushing out and
stamping on any undesirable, unintended consequences of
this seismic change in the at-retirement market.
Up until recently much of the attention has focused
on the volume of over 55 years olds cashing out
completely and levels of access to advice (or guidance).
In the last week, there has been a detectable switch of
focus to the new decumulation option of choice – Income
Drawdown.
The FCA’s desire to know more about how
these products are being sold and operated, and what
charges are passed onto policy holders in drawdown (DD),
is not that surprising when you look at the speed of
growth of this market as annuity sales have waned.
The latest Association of British Insurers (ABI)
numbers report
19,600 DD contracts were sold in Quarter
2, 2015 worth a total of £1.3bn, up from 11, 500
contracts in Q1, 2015. DD sales were virtually half that
pre-Freedom Day in Q1, 2014 at 6,700 contracts. So the
market is growing by both number of contracts and value
at a rate of more than 50% a year on current numbers.
The main worry for the regulator is that
‘internal sales’, as a percentage of the whole market,
is creeping up and now stands at 42% of all DD sales.
This means that nearly half of all purchasers of DD
contracts are failing to shop around for a DD offering.
The second most significant concern for the FCA has to
be the lack of uniformity and levels of charges by
Drawdown providers.
Because we provide
administration capability for many of these contracts we
are able to see the profusion of charges which are
currently being levied by DD contract providers. A quick
investigation found 10 different charges which providers
are using right now.
These are, in no particular
order:
1. Transfer Out Charge – for moving from one
contract to another
2. Transfer Out Charge to
UK-based schemes
3. Transfers Out Charge to Overseas
Schemes
4. Annuity Purchase Charge
5. Tax Free
Cash Charge (in DD a member might be charged several of
these as they drawdown TFC by stages)
6. Income
Charge (essentially an annual DD usage fee)
7.
Crystallisation Charge (as monies are drawdown)
8.
Pot Depreciation Charge (taken just before the DD
balance goes to zero)
9. Review Charge (for those in
Capped Drawdown where pre-April 2015 DD scheme members
opting to be Capped will remain if they do not exceed
their stipulated maximum income allowance)
10. Death
Benefit Charge
These are before you get into
‘additional designated charges’ often associated with
phased drawdown.
In addition, there is little
uniformity in terms of amounts charged. In a study of
Transfer Out fees we conducted a little while ago, based
on a sample of 54 SIPP providers, we found fee amounts
varied enormously. Some charged more than £500, others
charged nothing at all. The average was £161.70 per
Transfer Out.
Very few providers have
rationalised these charges to a point where they can be
illustrated as a percentage of the value of the assets
held or amounts withdrawn over a given period for the
purposes of comparison or illustration. However this is
what the FCA may push for once they have gathered the
results of its survey on DD charges in mid-February,
published its findings and acted on them.
Product providers may well have good reason for specific
charges. Forcing uniformity as well as reductions of
charges often stifles innovation and restricts
providers’ ability to differentiate their offerings. But
they will need to make a strong case now for retaining
specific charges and they may need to volunteer more
information about precisely what each charge pays for.
The FCA is conducting its investigation for DD
charges alongside its wider Retirement Income Data
analysis. It has been collecting this data (about where
all at-retirement monies are now going) from providers
each quarter since April.
All this data and
analysis will be swept into its Retirement Outcomes
Market Study due to be published next summer. We can
expect several changes to follow thick and fast after
that. It will be important for Drawdown scheme providers
to make a strong case for retaining the charges they’ve
put in place for these schemes. Increased regulatory
scrutiny is inevitable as these products become the
dominant at-retirement scheme for decumulation.
Natanje Holt, Managing Director
Dunstan Thomas Holdings Limited.
Click here to request a call back or telephone 02392 822 254