Retirees who roll-over their superannuation into an account-based pensions risk paying high costs that will eat into their retirement nest egg.
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The difference in costs between the cheapest and most expensive allocation pensions can be more than five times, a review of 66 account-based pensions by researcher Canstar finds.
On an account balance of $750,000, the cheapest is ING Direct Living Super Pension with total annual costs of $2875.
The most expensive is BT Lifetime Flexible at $16,425.
These costs are based on the providers' product disclosure statements, but investors may receive discounts.
Record-low interest rates and the government's intention to tighten the assets test for the age pension make it even more important retirees do not pay too much for their allocated pensions. While investors cannot control returns from investment markets, they can control the fees and costs they pay.
Most retirees have an allocated pension - an income stream paid to the retiree by the fund with tax advantages - in addition to the age pension or the part-age pension.
In return for the tax breaks, a minimum percentage of the pension account balance must be withdrawn each year. That is to ensure the retirement savings are used for their intended purpose. The percentage increases with age of the retiree.
Retirees want decent yields on low-risk investments so that they can preserve their capital for as long as possible.
However, with interest rates at record lows and yields on cash investment so low, pensioners will be drawing-down more of their pension just to meet their living expenses. That will be even more so if the government's plans to tighten the age pension assets test are passed by the Senate.
Under the government's plans announced in the budget, home-owning couples will be allowed maximum assets, not including the family home, of $823,000 from January 1, 2017 - down from $1.15 million now.
Analysis of the proposed changes by actuaries Rice Warner shows for some, the changes will amount to a 10 per cent overall cut in their retirement income.
However, the wealthy to very wealthy will remain largely unaffected because the government has ruled out any moves to rein in the superannuation tax concessions going to the well off.
Mitchell Watson, the research manager at Canstar, says these factors make it a challenging time for self-funded and partially self-funded retirees. Retirees have lost hope that the relatively high returns from cash investments of only a couple of years ago will return for some time, he says.
Many also do not want to take more risk with their money, but they should, Watson says, consider taking on a bit more risk.
Of course, investors need to compare apples with apples. Allocated pensions, or account-based pensions, as they are also known, come with pre-set investment mixes designed to produce a level of income and capital growth.
They range from "conservative", with most of the money invested in defensive, income-producing investments, to portfolios with a higher portion of growth assets, such as shares. Some allocated pensions allow retirees to invest in individual shares and term deposits.
Allocated pensions can be compared by their costs and features at canstar.com.au/account-based-pensions/compare/high-balance/.
Five-star ratings, the highest star rating bestowed by Canstar, has been awarded to allocated pensions offered by AMP, ANZ (also through its subsidiary OnePath), AustralianSuper, ClubPlus and ING Direct.
The ratings are based on an account balance of $750,000. Total cost includes member fees, administration fees and "indirect cost ratios" for investment options based on an asset mix of 70 per cent growth assets and 30 per cent defensive assets.
