Less than 10 per cent of today’s retirees reach retirement with only DC savings and no DB entitlement but this will reach 50 per cent by 2060 says the report.
The PPI report says 68 per cent of individuals currently aged between 50 and state pension age have less than £7,000 yearly DB entitlement, with 49 per cent having none at all.
The report shows that proportion of drawdown products purchased without advice has increased from 5 per cent before the introduction of pension freedoms, to 30 per cent in 2017. It shows that 94 per cent of non-advised drawdown sales were made to existing customers.
The PPI says this supports behaviouralist theories that individuals will often choose the ‘path of least resistance’. It also suggests that there may be limited competitive pressure to offer good deals to consumers, which can potentially lead to higher charges, lower quality products and less innovation in the future. Individuals who access advice are more likely to shop around when choosing a drawdown product, with 65 per cent of advised drawdown sales to new customers.
The report says millennials will benefit from improved outcomes provided they do not opt out of auto-enrolment, but the decline of home ownership since 2000 for all age groups except those aged over 65 means more people will reach retirement either renting or still paying off their mortgage. This will increase their living costs and therefore the amount of income they will require to achieve an acceptable standard of living in retirement.
In the first nine months following the introduction of pension freedoms, £6.1 billion was invested in 90,700 income drawdown products, an average fund of £67,500. Over the same period, £3.9 billion was paid out through 1.03 million income drawdown payments, with an average payment of around £3,800.
Proportionally, drawdown users with larger pot sizes withdraw at a lower rate compared to those with smaller pots, which are being withdrawn at a faster rate. For individuals with pots worth less than £10,000, the average income taken upon entering drawdown is around 30 per cent of the total pot. In comparison, this is around 2 per cent for individuals with pots valued at £50,000.
Among those with DC pots of £50,000 to £99,000, 58% purchased a drawdown product, 21% an annuity, and 18% made a full withdrawal. For those with DC savings of between £100,000 and £249,000, 68% purchased a drawdown product during this period.27
The report argues that the changes that have been observed in the three years since the introduction of freedom and choice are not necessarily representative of the decisions that will be made by future retirees Although there has been something of a rush to make use of the new options made available through the introduction of freedom and choice, the experience of the last three years is not necessarily representative of the decisions that people will make regarding retirement income in the future. This will depend on a number of factors, not the least of which being the extent to which providers create innovative solutions to the new retirement landscape. Furthermore, we will not be able to evaluate the outcomes of these decisions for some time.
Lauren Wilkinson, Policy Researcher at the PPI said “Freedom and choice has opened up new ways for people to access pension savings. However, it also opens up new challenges and risks. Future retirees will be reaching retirement with more different combinations of saving which will impact the decisions they make and the retirement outcomes they are able to achieve. Over time there will be an increase in the number of people reaching retirement at risk of making sub-optimal decisions that could have a significant negative impact on their retirement outcomes because of the complexity of savings portfolios, the risk attached to certain types of savings, such as DC savings, and low levels of understanding and engagement.
“Many people have not given much consideration to how they will access their pension savings in order to fund retirement, even among those who intend to retire within the next few years.”