Apathy will hit your retirement
Most savers who accessed their pension since the new pensions freedom changes didn’t shop around. Natalie Stanton explains why that's a costly mistake.
The majority of savers who have accessed their pension since the new pensions freedom changes were introduced last April didn't shop around for different products, according to a new survey from the Citizens Advice Bureau. Almost a quarter of those who stayed with their pension provider did so because they thought their current product delivered the best value despite not looking at options with other providers.
This problem is most pronounced among consumers who opted to use their pension for income drawdown. Doing this allows savers to keep their money invested in their pension fund and make regular or occasional withdrawals from it, rather than use their savings to buy an annuity that pays a regular, fixed income.
Just 39% looked at the option of transferring their pension to a different provider (that might have lower charges for drawdown than their existing one). More encouragingly, those who bought an annuity seemed to be slightly more aware of the importance of shopping around, with the survey finding that 57% had checked other providers' rates.
The most common reason why savers stayed put was that they trusted their current provider: more than one-third of those surveyed said that this affected their decision. Given that the financial services industry has a long track record of offering existing customers poor deals and banking on inertia to keep them from switching, this undoubtedly will have been a costly mistake. And almost 30% said their current set-up provided the easiest way for them to access their savings meaning that they may be paying a high price for convenience.
Citizens Advice is calling on the government to create a tool that would allow consumers to compare pension drawdown products in one place, similar to the facility that already exists to weigh up the benefits of various annuities.
This could be helpful, but only for those who are already organised enough to use it ultimately, savers still need to take responsibility for their own affairs.A more obvious area where regulators can easily improve the options that savers have is to limit exit charges: one in seven people said they stayed put because they wanted to avoid these.
The Financial Conduct Authority has announced plans to cap exit fees for current pension schemes at 1% of the fund's value, but this could still mean excessive charges for those with larger pensions. Citizens Advice's proposal for a maximum flat fee of, say, £50 to cover the provider's administration costs and no more sounds more equitable.