Poor rates of shopping around have long plagued the annuity market. In fact, the failure by the industry and policymakers to remedy this problem was part of the reason chancellor of the Exchequer George Osborne tore up the retirement landscape through the introduction of the pension freedoms last year.
But what of income drawdown? Citizen’s Advice published research earlier this month which, on the face of it, paints a disturbing picture of consumer inertia. According to the charity, just three in 10 people who have accessed the freedoms considered switching provider, with almost a quarter (24%) saying they thought their existing administrator offered the best value – even though they had not checked elsewhere.
And Citizens Advice went further, warning: “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.”
A conclusion of this nature would be deeply worrying – were it not utter drivel.
Let me start by saying that scrutiny of the drawdown market is not just a good thing – it is essential. Sales have gone through the roof since April last year, with most customers now entering drawdown without advice. Regulators, politicians and the media would be abrogating their responsibilities to consumers if they failed to hold the industry’s collective feet to the fire.
But clumsily comparing drawdown to annuities – and suggesting shopping around behaviour is better in the annuity market – betrays a fundamental misunderstanding of the differences between the two products.
While annuity purchase, at least for now, is a one-and-done decision, drawdown – unless you are in the minority of people who take the lot in one go – does not finish when you first access your pot. Reviews should therefore be carried out on an ongoing basis and encompass not just provider choice but investment strategy, costs and charges, and flexibility, among other things.
It is this complex picture that makes advice so valuable in the drawdown market for those who can afford it. Furthermore, competitive pressures have driven down product costs to the point where savers may decide minor price differences do not justify ditching their provider.
Consider, for example, a typical drawdown pot worth £150,000 on a low-cost self-invested personal pension (SIPP) platform. The extra charges that might apply to that SIPP product when a saver goes into drawdown are likely to be less than £150 a year – not even 0.1% of the value of the pot.
An additional charge of less than one-tenth of a percent is unlikely to make a saver who has based their product choice on a whole host of things suddenly change their mind.
That is not to say shopping around is not important in drawdown – clearly it is, and the fact savers are free to leave their existing provider in favour of a cheaper or better quality rival has moulded an extremely efficient market.
But it is incumbent on those scrutinising the market – and particularly organisations as influential as Citizens Advice – to understand how it works before drawing fundamentally flawed and potentially dangerous conclusions.
Tom Selby is a senior analyst at AJ Bell
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