Research from Citizens Advice found that exit fees and other charges are not being levied consistently and are confusing for customers.
The charity estimates that up to 160,000 people have paid fees to access their pension since April 2015, paying an average £1,577.
But those with smaller pots are the group hit hardest, as people with pensions of £20,000 ($28,970, €25,490) or less are paying an average of £1,966.
For some consumers this means they could lose up to 10% of their retirement savings.
While the Financial Conduct Authority (FCA) has recently proposed capping exit fees for current pension schemes at 1% of a person’s pot value, Citizens Advice believes this cap is too high and is calling for a standard £50 charge to cover provider’s administration costs.
Not shopping around
The survey also found that seven in 10 people who have accessed their pension since the freedoms were introduced in April 2015 didn’t shop around for different products.
A quarter (24%) of consumers who stayed with their pension provider did so because they thought their current product offered the best value – despite not looking at other options.
Based on the survey of over 500 people who have accessed their pension under the new freedoms, the report found that people chose to remain with their existing provider for several reasons:
- 36% said they trusted their existing pension provider;
- 30% had a product that met their needs;
- 29% said they stayed with their existing provider because it was the easiest way to access their savings;
- 15% wanted to avoid exit charges.
Annuity buyers buck the trend
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.
Biggest financial decision
Gillian Guy, chief executive of Citizens Advice, said: “Picking a pension product is one of the biggest financial decisions people will ever make, so it’s worrying that so many aren’t shopping around.
“More and more consumers are choosing drawdown products but our research shows they aren’t checking whether they’re getting the best deal. The government and industry needs to work together to make it easier for consumers to compare drawdown products and choose the one which best meets their needs.
“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,” Guy said.
Regular reviews required
Tom Selby, senior analyst at AJ Bell, said: “Shopping around for income drawdown should not be seen as a one-and-done decision to be made just when people first access pension freedoms.
“Selecting the best income drawdown product is different to 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. Regular reviews are required to make sure you are always getting the best deal.”