Reasonable Charges?

stevieb333

I am thinking of taking an income drawdown pension. After taking 25% lump sum the remaining pot should be about £110,000. I am initially hoping to take £100.00 per week as this is only slightly less than I would get from an annuity. Is it reasonable to think that £100.00 per week be sustainable along with a growth in the £110.000 pot? I know that no one has a crystal ball but I am looking to find some guard against inflation, hence the drawdown as opposed to an annuity.
Also I have been quoted a charge of 3% by my IFA to set up the drawdown, and 0.5% per annum to administer. Woild this level of charge be considered reasonable?
Thanks

M.R.W.

Hi, taking £100 per week means drawdown of £5,200 per annum, or 4.72% of your initial fund value (£110,000) in year one. If your investment funds deliver a decent return on average then you should be fine. To me it seems like a safe and sensible amount.

Regarding the charges, 3% initial is more or less the market rate for IFAs to take new assets under management so this is reasonable, and the 0.5% ongoing charge is actually a little below industry average (1% is the most common ongoing fee). As you'll be needing to keep your investments under regular review I think 0.5% is good value to retain an IFA for this.

jamesd

The 0.5% a year is £550 a year. That is 10.5% of your total annual income from the pension. 0.5% sounds reasonable until you realise that it's 10.5% of your total income before allowing for possible VAT on the fee and income tax on the pension income. After those it's up to 15.9% of your income, assuming the fee is coming from after tax income. I don't think it's fundamentally reasonable to pay an IFA 15.9% of your income from this pension pot. I don't think that 10.5% of your income initially appears reasonable either.

If you wish to use the IFA, perhaps you might try restating their fee in these terms as an initial part of a negotiation about how much of your income they think they can sensibly charge? An amount expressed as 10-15% of your income is a lot easier for them to see as big than the small-sounding 0.5% of the pot size even thought the actual cost to you is the same.

Given those numbers, have you considered DIY? Are you at all experienced in investing or interested in learning?

Have you evaluated level annuities or DIY for a while followed by possible annuity purchase? If you're 65 now it appears that a level annuity would start out paying £129 a week taxable, compared to £100 less £10.57 for the IFA (£89.43) ignoring VAT, both ignoring income tax. That's for a level single life annuity, while drawdown would provide a 100% income for a spouse and some inheritance at the final end, as well as probably some inflation protection that a level annuity doesn't have.

Assuming no spouse protection need, the annuity starts out at 1.442 times the income of drawdown less IFA cost. It takes about 12 years before 3% inflation reduces the annuity value enough to get down to that level and some more years before it breaks even after allowing for the income received before then.

At 65 I see a single life RPI annuity with five year guarantee might pay you £3,973 a year, or £76.40 a week. With 3% escalation instead, £4,622 or £88.88 a week. Compared to £89.43 or less from the drawdown solution after IFA cost. And an IFA could probably haggle to get a better income than that. But all of those are single life and one key benefit of drawdown is spousal income, so do you have a spouse to consider?

With that sort of number I'm really not very keen on use of an IFA at that level of charging for your situation. Are you sure DIY or DIY and some initial annuity purchase, perhaps reinvesting the higher initial annuity income, isn't a better idea? Maybe spend half on a a level annuity and invest both the other half and the extra annuity income yourself?

Even if you will not spend more than £100 per week, do take the maximum permitted by the GAD limit and reinvest inside a S&S ISA. This reduces your legislative risk and GAD change risk without any negative effect, except possibly from IFA or other fees.

Do you have any medical conditions that might reduce your life expectancy? Smoking, diabetes, heart trouble, overweight? Any of those and many others could qualify you for an enhanced annuity that would pay out significantly more.

M.R.W. I really do hope that few IFAs would think that taking a 1% fee and hence 31.8% of this annual income is reasonable. Well, unless the IFA concerned wants some free adverse publicity in the Daily Mail with a rip-off IFA headline. Even at £100 a week with the IFA getting £10.57 a week from that it's asking for adverse headlines.

dunstonh

M.R.W. I really do hope that few IFAs would think that taking a 1% fee and hence 31.8% of this annual income is reasonable. Well, unless the IFA concerned wants some free adverse publicity in the Daily Mail with a rip-off IFA headline. Even at £100 a week with the IFA getting £10.57 a week from that it's asking for adverse headlines.

1% is becoming more common on small values. Typically sub £100k. 0.50% is still more common on larger amounts. At £110k, he could find firms doing 0.5% to 1% and anything in between.

bmm78

I don't think many IFA firms would go lower than 0.5% on a £110k pot. If it was to go below £500 it doesn't make a great deal of economic sense for the IFA.

It's important to consider the overall ongoing charge as well, including fund charges, platform charges etc.

Whether £550 is "reasonable" or not is ultimately down to the individual and what value they are likely to get from it. Some people are more than capable of DIY, but others will end up costing themselves a lot more than that in the long run. It really depends whether or not the individual "needs" advice.

OP - obviously I'm not privy to your full circumstances and what you've already discussed with the adviser, but have you considered investment-linked annuities? Just my personal opinion, but I'm a bit wary sometimes where people fully crystallise into drawdown and then take the same income they would get from an annuity. If hedging against inflation is the main driver, and much of the drawdown flexibility isn't needed, I'd certainly be considering investment-linked annuities alongside drawdown.

gadgetmind

stevieb333 wrote: »

Also I have been quoted a charge of 3% by my IFA to set up the drawdown, and 0.5% per annum to administer. Woild this level of charge be considered reasonable?

IFAs no longer charge based on percentages, or so I'm told. Ask them for their RDR compliant charges.

For a pot of your size, your best option is probably to "DIY", which sound scary but just means that you choose an asset allocation yourself and then find the cheapest place to manage this in drawdown.

Here is a *great* place to ask how to do this, but you *will* need to put in some reading and some thinking. As with all DIY, you need to do it right or get in a professional.

jem16

gadgetmind wrote: »

IFAs no longer charge based on percentages, or so I'm told. Ask them for their RDR compliant charges.

Who told you that? Percentage fees are acceptable after RDR. Normally though, for larger amounts, you would expect to see some sort of cap on it.

gadgetmind

jem16 wrote: »

Who told you that?

IFAs hereabouts.

Percentage fees are acceptable after RDR.

So what was the point? What we all want is to be able to access an IFA for some advice (such as I get from my financial and legal peeps) for an hourly fee.

Normally though, for larger amounts, you would expect to see some sort of cap on it.

I'd expect to pay an hourly fee based on category of IFA. Normal run of the mill IFA (IFA equivalent of A-levels) for a tenner an hour, someone on the foothills of a degree for graduate hourly pay, and so on.

For someone with decades of experience and "ninja skills", the sky is the limit, but very few investors need anything like this.

jem16

gadgetmind wrote: »

IFAs hereabouts.

Some have and some haven't.

So what was the point? What we all want is to be able to access an IFA for some advice (such as I get from my financial and legal peeps) for an hourly fee.

Hourly fee was always available even pre RDR. It was necessary if you were an IFA to offer both fees and commission.

Post RDR the whole point was to make the payment more explicit and separate from the product.

I'd expect to pay an hourly fee based on category of IFA. Normal run of the mill IFA (IFA equivalent of A-levels) for a tenner an hour, someone on the foothills of a degree for graduate hourly pay, and so on.

IFA qualifications are higher now. Good luck in finding one for £10ph. I can't even find a handy-man doing small jobs around the house for £10ph.

To be honest, I would prefer a fixed fee for the work so I know exactly what is going to be charged. I suspect the majority of IFA clients go with this too.

stevieb333

Thanks for some eye opening answers. I have been told by a few people that 3% set up and 0.5% admin fee's are pretty much the industry norm. After reading Jamesd comments, though, it does shed a different light on the fees that I hadn't really considered. But with not really feeling confidant with DIY I don't really see where else i can go! The reason for me opting for drawdown is that I am only 56, and i am taking my pension early as I have just been made redundant. I have BTL investments and the fact that I would no longer have to pay almost £300P/M into my pension fund and the £100 P/W would just about make an income not to far distant from when I was working. With Annuity rates at an all time low (so I am told) I was hoping that I may be able to annuitise at a later date with my pot still, hopefully, healthy.

Wilkins

stevieb333 wrote: »

With Annuity rates at an all time low (so I am told) I was hoping that I may be able to annuitise at a later date with my pot still, hopefully, healthy.

Personally, I would find a withdrawal rate of 4.72% unsafe, in the sense that capital preservation of the £110k is likely to be threatened. The generally accepted and empirically tested rate in the US is 4% (though that has been challenged). I don't think there are any equivalent studies in the UK, but it's unlikely to be better.