Seven in 10 people who have accessed their pension since April 2015 have not shopped around for different products and risk ending up making a poor value or unsuitable selection as a result, according to research from Citizens Advice.
In a report out today, the charity found 24 per cent of those who stayed with their pension provider did so because they thought the product they were offered delivered the best value, despite not looking at options with other providers.
More than a third – 36 per cent – said they trusted their existing pension provider, while 30 per cent said they had a product that met their needs, and 2 per cent said they stayed because it was the easiest way to access their savings. The research, based on a survey of over 500 people who have accessed their pension since the freedoms were introduced, found 15 per cent stayed with their existing provider because they wanted to avoid exit charges.
Consumers who buy annuities are more likely to shop around with 57 per cent checking products with other providers. This compares to 39 per cent who bought a drawdown product and just 14 per cent for those taking cash.
Citizens Advice is calling on the government to create a tool for consumers to compare pension drawdown products in the one place, similar to the one that exists for annuities.
The report, ‘Drawing a pension’, also drew on in-depth interviews with people who have used the new pension freedoms. It found some consumers aren’t shopping around because they are worried they will be hit with excessive fees if they move away from their current provider.
A 68-year-old woman who was interviewed for the research said she checked her pension after divorcing from her husband as she wanted to check whether she had enough savings to support herself. She found out her pension had significantly dropped in value because her provider had moved it into a higher risk investment. Despite the negative experience, when the woman came to making a decision she stayed with her provider because she thought switching would incur larger fees than staying put.
Citizens Advice’s analysis reveals up to 160,000 people have paid fees when accessing their pension since the freedoms were introduced.
Those with smaller pots are the group hardest hit – people who have pensions of £20,000 or less who have faced fees are paying an average of £1,966.
While the FCA has recently proposed to cap exit fees for current pension schemes at 1 per cent of a person’s pot value, Citizens Advice argues this cap is too high and is calling for a standard £50 admin charge across the industry.
Citizens Advice chief executive Gillian Guy says: “Picking a pension product is one of the biggest financial decisions people will ever make, so it’s worrying that so many aren’t shopping around.
“More and more consumers are choosing drawdown products but our research shows they aren’t checking whether they’re getting the best deal. The Government and industry needs to work together to make it easier for consumers to compare drawdown products and choose the one which best meets their needs.
“The threat of excessive charges can also put people off making the right pension choices for them. A standard £50 exit fee across all types of pensions will mean consumers can make the most of the pension freedoms.”
Just Retirement group communications director Stephen Lowe says: “The new pension freedom rules have put much more responsibility on individuals to use their pensions wisely but clearly that is not happening in far too many cases. This report takes us back 10 years to the bad old days when many people were herded into poor value deals without exercising any active choices. Today that’s as likely to be income drawdown plans that have become a mass-market product despite the extra risks and costs compared to guaranteed income solutions.
“It was clear from the start the new rules would create a very complex and potentially risky environment which many people would struggle to navigate. With expectations so high and knowledge so low, it’s not a surprise to see scams and poor decisions proliferate. The Government tried to address this by creating guaranteed guidance but, useful as the sessions are, this report again highlights the fact that formal guidance is not achieving the reach required. Our view is that rather than opting in to guidance as at present, it should be provided automatically unless people opt out. What’s needed is a nudge or ideally a shove. That could transform the quality of decision-making at a time in life when it does pay for people to know what they are doing.
“Perhaps of most concern, again reflected in this report, is the fact that many people aren’t shopping around. This is simple stuff but some people appear almost paralysed into inactivity. They think there might be charges without even checking, they think their own provider offers best value without shopping around to find out, and they think they will be rewarded for staying loyal.
“Sadly this report provides more evidence of what, even at this early stage of pension freedoms, are widely recognised problems. The Financial Conduct Authority knows competition is not working well and in the next few weeks we expect more details of proposed improvements which include better comparisons across products to aid shopping around, a rethink of the information given to consumers such as wake-up packs to make them more relevant, and better framing of consumer choices to put the focus on better decision-making rather than to drive sales. Those changes can’t come soon enough.”
AJ Bell senior analyst Tom Selby says: “Shopping around for income drawdown should not be seen as a once-and-done decision to be made just when people first access pension freedoms. Selecting the best income drawdown product is different to shopping around for an annuity. An annuity is a one-off decision whereas under pension freedoms you can switch income drawdown products at any time. Regular reviews are required to make sure you are always getting the best deal.”