As we mark the 10th anniversary of the Pension Freedoms legislation, Mercer is taking a look at how this has changed some commonly held beliefs and misconceptions. In this first article of the series, Mercer addresses a particularly concerning myth: that individuals use their pension savings to secure a sustainable income in retirement.
Turns out the answer is false. Most people do not use their pension savings to secure an income in retirement.
The Reality of Pension Withdrawals
Data from the Mercer Master Trust reveals some worrying trends:
- 81% of members entering drawdown did not use their pension pot to provide an income,
- Members are three to four times more likely to access their pension cash at age 55 than at 60 or 65, indicating a tendency to withdraw funds much earlier than you may expect
- Fewer than 5% of individuals adjust their target retirement age accordingly, suggesting a disconnect between aspiration and reality.
- 33% of those taking cash payments up front are paying more than 40% in tax.
Government data supports these findings, indicating that many individuals are not using their savings to replace their employment income. Alarmingly, 38% of individuals accessing their DC pensions used the funds for immediate living costs, and 59% of those accessing their DC pension before State Pension age had no other private pension provision. This reliance on pension funds for short-term needs undermines the very purpose of these savings, which is to ensure a sustainable income throughout retirement.
The Need for Informed Decision-Making
While the introduction of Pension Freedoms has provided individuals with greater flexibility, it has also underscored the urgent need for informed decision-making. Individuals may lack the necessary knowledge to navigate the complexities of pension access or understand the implications of their choices.
In response to this trend, Mercer has launched the Early Pension Cash service in collaboration with HUB Financial Solutions. This service focuses on educating members about the potential tax liabilities associated with access to their pension funds and the risk of losing out on valuable investment returns. Stephen Coates, Head of Proposition for the Mercer Master Trust, emphasised the importance of this initiative, stating:
“Ours is a product designed for our members, reflecting their needs and behaviours. Educating our customers about the impact of their decisions is crucial. When it comes to pensions, we often create products based on what we think people should be doing, rather than what they are actually doing.”
“While we do not advocate early cash withdrawals, we recognise that many members are choosing this route. As custodians of their retirement, it is our responsibility to help them make informed decisions and take this action safely. The Early Pension Cash service aims to simplify the decision-making process, encouraging individuals to take a holistic view of their financial situation. Importantly we want to prevent our members from making ill-informed decisions that could see them losing out on vital retirement income.”
Looking ahead
Reflecting on the past decade of Pension Freedoms, it is clear that while individuals have gained more choices, they may not be equipped to make the best decisions for their long-term financial security. A well-planned retirement should prioritise sustainable income over immediate cash needs, ensuring a stable and fulfilling life when regular paydays cease.
As the landscape of retirement planning continues to evolve, it is essential for individuals to seek guidance and support in navigating their options. Mercer’s report ‘What’s the Price of Freedom?’, highlights the importance of informed decision-making in retirement planning and the need to build products that support members in making informed decisions that lead to better retirement outcomes.
