Seven in 10 people who have accessed their pensions since the new freedoms were introduced did not shop around for different products, according to new research by Citizens Advice.
The report shows that those respondents who bought annuities were also most likely to shop around before they made a decision (57% did so).
This compares to two in five (39%) of those who bought a drawdown product and just 14% of those who decided to take their whole pot out. The survey is based on a relatively small survey of 500 people who have accessed their pensions.
Citizens Advice urges the government to create a tool for consumers to compare pension drawdown products, similar to the one which exists for annuities.
At Moneywise we have our own pension fund comparison tool, which you can click here to use.
When it came to why respondents chose to stay with their existing providers, one third said it was because the provider had a product which met their needs, while another third stayed because it was the easiest way to access their savings.
Tellingly, more than one in seven people (15%) did not consider other products because they wanted to avoid exit charges.
Citizens Advice cites the example of a 68-year-old woman whose pension had significantly dropped in value because her provider had moved it into a higher-risk investment. Despite this negative experience, she stayed with her provider to avoid incurring large fees.
Up to 160,000 people have paid fees when accessing their pension since the freedoms were introduced, according to the report. Those with smaller pots have been hit the hardest.
People who have pensions of £20,000 or less are paying an average fee of £1,966. This means they lose about 10% of their retirement savings to charges.
The Financial Conduct Authority has recently proposed to cap exit fees for current pension schemes at 1 per cent of a person's pot value. But Citizens Advice believes this cap is too high and calls for a standard £50 charge instead to cover provider's administration costs.
Drawdown comparison needed
Gillian Guy, chief executive of Citizens Advice, says: “The government and industry need to work together to make it easier for consumers to compare drawdown products and choose the one which best meets their needs.”
She adds: “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.”
Commenting on the report, Tom Selby, senior analyst at AJ Bell, says selecting the best income drawdown product is different from 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. Therefore regular reviews are required to make sure you are still getting the best deal.
Rob Morgan, pensions and investment analyst at Charles Stanley, says: “Staying with your existing pension provider may be the easiest route for people as they start to draw their pension, but it may not be the best option.”
The main things to consider when weighing up drawdown providers, says Morgan, are charges, investment choice, customer service and level of flexibility in terms of taking income and/or lump sums.
While there are many factors that make selection of income drawdown products a more complicated decision than comparing annuity rates, there are still a very large proportion of people not shopping around for annuities either, according to Morgan.
This reveals that there is still a wider problem of people not fully engaging with their retirement plans.
This story was originally written for our sister magazine, Money Observer.