The IFS warns that as more private sector employees accumulate retirement savings in DC pensions, many risk making poor financial decisions due to uncertainty around life expectancy, inflation, asset returns, and limited access to advice, potentially exhausting savings or being too cautious with spending.
According to two recent IFS reports, there is an increasing risk that retirees with substantial DC pension pots would make bad financial decisions that jeopardise their long-term stability. The reports demand better access to financial advice and more transparent default settings, as 41 per cent of people are at risk, and many do not have the right advice.
According to the first report, “Individuals’ challenges managing pensions through retirement,” defined benefit (DB) pension ownership has decreased over the past 15 years, whereas DC pension ownership among those aged 55 to 64 has increased, rising from 44 per cent to 59 per cent. Meanwhile, the average DC savings at retirement have risen, with individuals born in the early 1970s predicted to have £102,000 at retirement, which is 38 per cent higher than their predecessors.
However, 41 per cent of retirees are still at risk of making poor financial choices, with 73 per cent of people aged 55–59 reporting they have not received pension advice in the past three years.
The second report, “Policies to help people manage defined contribution pension wealth through retirement”, highlights that pension freedoms have led to fewer retirees buying annuities, leaving many to navigate their withdrawals without clear guidance.
The IFS points to the growing need for “flex then fix” models, where individuals have the flexibility to withdraw from their DC pots early but can annuitise later in retirement for longevity protection.
Additionally, the report calls for pension pot consolidation, gradual increases to the minimum pension access age, and clearer communication on tax benefits to avoid early lump-sum withdrawals.
Hymans Robertson head of DC markets Paul Waters says: “We welcome today’s report from the Institute of Fiscal Studies and fully support their findings that DC pension scheme members face significant challenges at and through retirement which must be urgently addressed. As the “DC only” generation grows and matures, the impact of the challenges set out in the report, especially the risk of people exhausting their income too early, will become increasingly obvious.
“Providing DC members with greater protection against longevity risk should be a priority. This can be achieved through DC schemes by building in some form of annuitisation as members get older, or is inherent in the design of CDC, which also offers this protection. Regardless of the design choice, a default approach for members to give them a core path with few tricky decisions should be adopted.
“As we look to the start of the financial year, mere days away, the challenges that employers face from National Insurance changes, a cost-of-living crisis and a difficult economic outlook are significant. Policy makers recognise this, and in the short term we therefore need to focus on delivering initiatives that do not cost employers more but can improve retirement outcomes for savers. Many of the recommendations in this paper are aligned to this.”
Standard Life managing director for individual retirement Claire Altman says: “The retirement landscape has changed dramatically in the ten years since pension freedoms and today’s reports recognise the fact that policy and product solutions are still playing catch-up. Those accessing their pensions have a great deal of flexibility and choice but they are also shouldering significant risks when it comes to making their savings last. These challenges mean that two-fifths (41 per cent) of retirees will be at high or medium risk of making poor decisions.
“The report correctly identifies a lack of guaranteed income as one of the most significant challenges for retirees and we agree that blended approaches such as the ‘flex then fix’ model highlighted are part of the solution. Our own modelling shows that a combination of drawdown and annuities can offer an attractive combination of certainty as well as the potential for investment growth.
“As the government prepares to legislate for default retirement income solutions, the paper acknowledges that two of the key enablers are a reduction in the number of small pots and increased access to guidance and advice. Everyone’s retirement will look different so creating a system that enables people to seek support to maximise their income and one which gives them a comprehensive view of their total savings is critical.”
