Watch out for high charges when accessing your pension

More people are using pension drawdown to access their retirement savings – but many could be paying higher charges than they need to by not shopping around. 

Nearly 280,000 people entered drawdown in 2023-24, according to data from the Financial Conduct Authority – an increase of 28% on the year before. 

Flexibility is the big selling point: drawdown involves leaving your pension invested, and you can then make withdrawals whenever you choose. 

Many people remain with their existing pension provider when going into drawdown. But it pays to shop around, as fees can vary significantly.

In fact, our analysis shows that you could save as much as £35,000 over 10 years by switching to a cheaper provider. 

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How pension drawdown works

Pension drawdown is an option for all savers aged 55 or over (rising to 57 in 2028) who have a defined contribution (DC) pension.

The ability to take income to suit your needs, combined with the possibility of your pot continuing to benefit from investment growth, has clearly been a big hit with retirees. But there are potential downsides too. 

Leaving your money invested puts you at the mercy of the markets. If they’re volatile, your portfolio could easily lose a good chunk of its value.

The worst-case scenario is that you run out of money entirely, either by taking out too much cash or because your investments underperform – or a combination of both.  

• Find out more: What is pension drawdown?

How much does pension drawdown cost?

Regardless of how your investments perform, your pension drawdown provider will levy platform charges year in, year out. 

The core drawdown charge is usually a fixed admin fee or a platform fee calculated as a percentage of the money you have invested. 

This might be a single percentage fee charged on the entire value of your pot, or a range of percentage fees applied to different portions (for example, 0.4% on the first £100,000; 0.3% between £100,001; and £250,000 and so on). 

Don’t forget that you’ll also be paying fees on the individual investments in your drawdown plan. 

• Find out more: Pension drawdown charges compared

How switching drawdown provider can save you thousands

We calculated how much you’d pay over a year with 14 providers, based on different pot sizes. These calculations are based on drawdown fees and fund fees for investment pathway 3.

Investment pathways are an industry initiative designed to help drawdown customers who don't get financial advice to make investment decisions. They are a range of ready-made investments chosen by a provider on your behalf (if you don’t wish to pick your own), which are geared towards different retirement objectives:

Investment pathway 3 is meant for people who plan to start taking money as a long-term income within the next five years.

Based on a pot worth £350,000 – the average among drawdown customers we surveyed – these fees ranged from around £1,000 (Interactive Investor) to £4,000 (Prudential/M&G). 

Over 10 years, paying the higher level of charges compared with the lowest could mean you end up with £35,000 less in your drawdown fund.

Prudential/M&G proves expensive as it has a low platform charge (0.15%) but a high fund fee (1.01%) for its nominated investment pathway 3 option, the PruFund Risk Managed 2 fund.

• Find out more: Pension drawdown calculator – making your money last

Our recommended pension drawdown providers

To become a Which? Recommended Provider of pension drawdown, companies need a high customer score (70% or more) in our survey of nearly 2,000 customers, plus competitive fees across all six pot sizes we looked at (£50,000, £100,000, £250,000, £350,000, £500,000 and £750,000). 

Four providers have made the grade this year: Vanguard, Royal London, AJ Bell and Fidelity. 

• Find out more: Our pension drawdown provider reviews in full

Pension drawdown alternatives

Pension drawdown isn't the only way to turn your pension savings into an income in retirement.

Annuities

Buying an annuity involves swapping some or all of your pension savings for a guaranteed regular income that will last for the rest of your life (or for a fixed period, if you choose).

Unlike drawdown, you'll have certainty over the amount you'll get each year and there's no investment risk involved.

One-off lump sums 

The technical term for regular ad-hoc withdrawals from your pension is 'uncrystallised funds pension lump sums (UFPLS)'. 

With this option, you can take all your pension in one go, or a series of smaller lump sums as and when you want, similar to drawdown.

The first 25% of any withdrawal will be tax-free (up to £268,275), and the remaining 75% is subject to income tax.

Check your annuity options

Which? says you can trust HUB Financial Solutions to compare across the whole market

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