- Almost half of defined contribution (DC) pension savers in their 50s and 60s haven’t considered how they will access their retirement pot, new research published today shows (How important are defined contribution pensions for financing retirement? | Institute for Fiscal Studies (ifs.org.uk))
- People with low levels of pension wealth are less likely to know how they will access pension, Institute for Fiscal Studies research suggests
- “Large majority” of DC pension savers take their entire pension in one go – but average full withdrawal of £22,600 is “small fraction” of overall wealth
- The post-mini-Budget bond market nightmare shows the damage low levels of engagement can cause to people’s retirement plans
- Findings drive home the importance of reforms designed to improve engagement levels among Brits, including the advice/guidance boundary and pensions dashboards
Tom Selby, head of retirement policy at AJ Bell, comments:
“Boosting engagement levels throughout the retirement savings journey, particularly in the run-up to pension access and as savers start taking an income from their hard-earned pot, is crucial as the UK transitions from a system dominated by guaranteed defined benefit (DB) pensions to one where savers have more flexibility and responsibility through defined contribution (DC) plans.
“While on the face of it the fact almost half of DC savers haven’t got a clue how they will access their retirement pot might be a cause for concern, there are some fairly obvious reasons why this might be the case. Anyone in their mid or even late 50s could be a decade or more away from touching their pension, so you wouldn’t necessarily expect them to have considered how they might go about this.
“Furthermore, for the majority of people who choose to enter drawdown when they first access their pension, this point in time will not necessarily require a big change in their investments. For those just accessing their tax-free cash, for example, there might be no need to shift their underlying investment approach at all – although de-risking the portion they plan to access could be sensible.
“Anyone entering drawdown might want to move some money into cash to pay their income and move to a strategy focussed on delivering that income, but again this won’t necessarily mean a big overhaul of their underlying investments.
“Once you start taking an income through drawdown, engagement is absolutely critical, particularly to ensure you are invested appropriately and aren’t risking exhausting your pot too soon. Similarly, for those planning to buy an annuity, engagement at least five years prior is critical to make sure your investments are in order.”
The mini-Budget disaster and a lesson in the importance of retirement engagement
“We saw the damage low levels of engagement can do in the run-up to retirement in the wake of last year’s nightmare mini-Budget and the subsequent plummet in government bond prices.
“Huge numbers of people invested in so-called ‘annuity hedging’ funds – which are heavily tilted to bonds with the aim of hedging against annuity rate movements – now intend to enter drawdown and keep their fund invested.
“As a result, they have found themselves on the wrong side of a bond nightmare, facing up to double-digit falls in the value of funds many mistakenly thought were ‘safe’ and being forced to completely rethink their best-laid retirement plans.”
The advice/guidance boundary and dashboards
“To bolster engagement levels, the government and regulators need to think radically. That is why ensuring people receive the help they need throughout their working lives and into retirement – either through advice or guidance, or a combination – is so crucial. Work being carried out by the Treasury and FCA to address the fog that currently sits around the advice/guidance boundary has the potential to dramatically improve the help and information customers receive about their savings and investments.
“Alongside this, pensions dashboards should, over time, make it easier for people to locate and ultimately combine their retirement pots as they approach retirement. Having a single pension in one place can make it easier to engage with that pot and ultimately turn it into a sustainable retirement income in your later years. The government needs to provide clarity over the timetable for dashboards and crack on with making them a reality ASAP.
“The final piece of the puzzle is simplification of the savings products people engage with. The government has made a good start on this front by moving to ditch the pensions lifetime allowance, but the ISA landscape, which has become unwieldy and complex in recent years, is now ripe for reform.
“Moving to a single ISA tax wrapper that savers can more easily understand could be a game-changer and help encourage millions of people make better decisions about their long-term savings and investments.”
