10th June 2016
Citizens Advice has called on the government to cap pension exit charges at £50 a time as it says people with smaller pots of £20,000 are losing as much as 10% of their savings.
Seven in 10 people who have accessed their pension since new freedoms were introduced didn’t shop around for different products, reveals new research by Citizens Advice.
In a report out today, the advice charity finds a quarter of consumers (24%) 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.
Citizens Advice is warning that if consumers don’t look at a range of different pension products they may end up with a poor value product which doesn’t meet their needs.
Based on a survey of over 500 people who have accessed their pension since the freedoms were introduced, the report reveals the reasons why people are choosing to stay with their existing provider:
Over a third (36%) said they trusted their existing pension provider
One in three (30%) had a product which met their needs
Three in ten (29%) said they stayed because it was the easiest way to access their savings
More than one in seven people (15%) wanted to avoid exit charges
Consumers who buy annuities are more likely to shop around with over half (57%) checking products with other providers. This compares to two in five (39%) who bought a drawdown product and just 14% 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 which exists for annuities.
The new report ‘Drawing a pension’ is also based on in-depth interviews with people who have used the new pension freedoms, and finds 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 see 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.
The new Citizens Advice analysis shows up to 160,000 people have paid fees when accessing their pension since the freedoms were introduced. Those with smaller pots are the group which has been hit the hardest, as people who have pensions of £20,000 or less who have faced fees are paying an average of £1,966. For some consumers this can mean they have lost 10% of their retirement savings to charges levied by providers.
While the FCA has recently proposed to cap exit fees for current pension schemes at 1% of a person’s pot value, Citizens Advice believes this cap is too high and is calling for a standard £50 charge to cover provider’s administration costs.
Gillian Guy, chief executive of Citizens Advice 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.”
Findings are based on a ComRes survey of 501 British adults aged 55+ who accessed their DC pensions after April 2015 carried out between 17th and March and 1st April 2016. Also includes qualitative depth interviews with twenty consumers who accessed their DC pensions for the first time after April 2015. These were conducted by Citizens Advice research staff in February and March 2016.
Income drawdown providers have pointed out that you can change the decision any time you want.
Tom Selby, senior analyst at AJ Bell says: “Shopping around for income drawdown should not be seen as a one-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.”