Today’s pension savers are in danger of ‘sleepwalking’ into retirement without proper advice or support according to a new industry report.
The DC Investment Forum’s report for 2019, takes an in-depth look at the five years since pension freedoms were introduced.
It says with the “plethora” of options now available there is often a mismatch between investors’ stated intentions and likely outcomes as a result of their choices.
The report says that contrary to expectations, the long list of potential retirement options is resulting in members following the path of least resistance.
It pointed out many are taking their lump sum without thinking about the rest of the picture. Meanwhile half of members who have not yet retired have not spent much time thinking about how they will manage financially in retirement, and 13 per cent have not thought about it at all.
In qualitative interviews, it became clear that even members who thought they had had made plans had not conducted any basic financial planning exercises, such as working out their basic living expenses, and 20 per cent had no idea how much was in their DC pension.
The report – which surveyed 18 providers and over 500 consumers – found many savers did not want to have to make decisions about what to do with their pensions on their own, and wanted guidance from providers for their bespoke set of circumstances.
Over half (54 per cent) wanted to be able to tailor a journey suggested by a provider to suit them, and 23 per cent were happy to leave it entirely up to the provider to work out how much money they could take out from their pension every year.
Members were more accepting of the idea that they might run out of money in retirement than common industry wisdom suggests. A quarter (24 per cent) of respondents believed their DC savings would run out within 10 years.
However, today’s retirees often have other sources of income to fall back on. Over a third (37 per cent) had more than £50k in cash savings and 14 per cent had a second property, for example.
The report points out that over the next few decades, DC pension pots will gradually constitute a bigger component of people’s overall wealth than they represent today – making it more important that they last the distance.
The survey found that majority of providers (16 out of the 18 interviewed) are either planning to introduce or already offer the FCA’s investment pathways.
While providers’ focus has been on redeveloping their operations to make the freedoms possible, their attention is now turning to areas like advice and investment design. However the report also highlighted that the cost of this advice varies hugely from provider to provider.
DCIF chair Vivek Roy says: “Just because there are no defined liabilities to meet in DC does not mean there shouldn’t be a benchmark to beat.
“Our research highlights that people need more support in making retirement choices. Providers see developing this as a key priority for future development. It is also interesting to see the disparity in providers’ asset mixes at retirement. We expect this to be an area of focus and development for providers in the coming years.”
“It may have been five years since freedom and choice, but we are still in a brave new world. Many of today’s retirees have other sources of wealth to draw on in their retirement. As DC pot sizes grow and become the main source of retirement income future generations are likely to make very different choices with their pension savings. That is why it is reasonable that providers are evolving their propositions, rather than starting a retirement revolution.”