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Drawing a pension: A consumer perspective on the first year of pension freedoms

27 Ionawr 2022

This is the second report [ 1.3 mb] of a three part series exploring how consumers think about and experience pension freedoms in the context of their broader lives. We evaluate use of the freedoms so far, adding for the first time a consumer perspective to the existing high level data on activity in the first year. We find that freedoms are working well for many, but identify a number of important problems which need to be addressed to make freedoms work for all consumers.

Of particular concern, we find that some consumers are facing:

  • Complex and high fees: Exit fees and other charges are not being levied consistently and are confusing consumers, and we estimate that 160,000 people have paid to access their pensions since April 2015. Those facing fees have reported an average cost of £1,577 in total. Most worryingly, this includes average fees of almost £2,000 for consumers with pots below £20,000.

  • Long delays: More than half of consumers received their first payment within a month their request, but almost one in six (16%) have had to wait over two months.

  • Limited product choice: Not all providers are offering the full range of freedoms to customers. Approaching half (44%) of those switching are doing so to access the product that meets their needs.

  • Ineffective risk warnings: Fewer than one 1 in 50 (1.6%) consumers say risk warnings had an effect on their choices. In contrast, 20% said their choice was affected by their first conversation with their provider.

  • Patchy levels of support: While two thirds of consumers are getting help with their choices, almost half (45%) of those with household incomes below £20,000 are not getting any support.

Chapter 1 provides a new typology of consumers using pension freedoms, featuring their different triggers and motivations. Triggers to engage with pensions such as key life events influence choices: those prompted by retiring, for example, are far more likely to buy an annuity whereas those responding to debt are more likely to take cash. We also find that while many consumers are motivated to make the most of their good retirement years, just 3% considered potential care costs as a key factor when accessing their pensions.

In Chapter 2 we examine what support consumers are using before accessing their pensions. We find that two thirds of consumers are getting formal or informal help with their choices, with free guidance the most popular single option (used by 29% of all consumers), followed by paid advice (24%). However, around a third (32%) are not seeking any help, particularly those with lower household incomes.

Chapter 3 explores how consumers go on to access their pensions in terms of which provider and freedoms they use. It shows that consumers face significant barriers to comparing providers, particularly for new products. While 57% of consumers who bought an annuity shopped around, just 39% of those who took a drawdown product did so. Many consumers have limited patience or time to compare offers, commonly because they have a pressing need to access their savings or because they experience research fatigue. Our qualitative research showed that trust is crucial here, and perceptions of charges, delays or risk can be as important as the reality.

Consumers with similar priorities can opt to access their pensions in very different ways. For example, some see annuities as offering the most security through a guaranteed income, whereas others think drawdown offers more security for their family if they die suddenly. Different solutions like these are in keeping with the principles behind the freedoms. But they also underline the need for consumers to understand their options, such as being aware of other products including joint life annuities and drawdowns with guarantees.

In Chapter 4, we present consumers’ experiences between formally requesting access to their pensions and receiving their first payment. It identifies a number of early teething problems that should be addressed.

Based on our findings, we make the following recommendations:

  • Regulators and the government should set a £50 cap on exit charges and tackle transfer delays such as by aligning transfer time limits with ISAs. These would improve consumer confidence both in switching and in pensions more generally.

  • The government should support the creation of an independent drawdown comparison tool reviewing the whole market to help consumers compare products in one place.

  • Government and providers should review how information about support can be better targeted at those not currently accessing guidance or advice. Almost half of consumers with the lowest household incomes are getting no help.

  • Providers should ensure that any advice requirements are communicated clearly. A third (35%) of consumers with advice requirements do not understand why they are having to pay. Better explanation will reduce consumer frustration.

  • The FCA should review what more can be done to provide risk warnings to all consumers earlier, particularly to protect consumers who have not had any support.

Citizens Advice delivers Pension Wise guidance on behalf of the DWP. This report reflects the views of Citizens Advice as a consumer champion in the financial services market, and not those of DWP or Pension Wise.