A new survey by Citizens Advice has found that people still aren’t getting the best deal with their pensions. Nearly one in four people are staying with their existing provider when selecting pension drawdown.
There are two real variables when choosing a drawdown provider.
Quality of fund management
The ongoing cost of drawdown can vary anywhere between 0.2% right up to 3% per annum. This charge is made up of annual management and product charges and can make a huge difference to your fund value.
Based on a pension of £100,000, the difference between the above figures is £2,800 a year. If you hold drawdown for 10 years, that’s £28,000 more you could have paid in charges. To put it another way, your fund could be worth £28,000 more.
Staying with an existing provider might be the easy choice but it’s more than likely going to cost you in the long run.
The main reasons people chose to stay with their existing provider are:
- 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
One of the surprising reasons people stated for not shopping around was the fear of exit charges. There are very few providers that levy exit charges to move a pension yet there is a genuine fear this is a common charge.
“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.”
The above scenario is hard to quantify given this ladies experience, but people are afraid of change and it why people aren’t shopping around.
People are more likely to shop around when looking for an annuity, according to the report. It found 57% of people didn’t accept their original providers rate and ended up transferring elsewhere.
Annuities are a little more straightforward to compare than income drawdown as it’s simply the provider who’s offering the highest income. It also doesn’t require any additional knowledge to buy an annuity, whereas there needs to be some level of understanding of investments with drawdown.