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How are members currently accessing their pension pot and how will this change as DC pots continue to grow?
Due to relatively small pot sizes, we find the majority of members are taking their pension as a cash lump sum; 82% of L&G members who retired in 2023 did so. But as pension pots grow – given additional contributions, investment growth, and further consolidation – we’d expect more members to look for an income solution in retirement. This could be drawdown, or new retirement products that offer income for life.
How are changing behaviours in retirement influencing product evolution?
As more members seek an income for life – and one that isn’t necessarily served via an annuity or drawdown – we’re seeing evolution in retirement products that can best deliver such a solution. This means there’s innovation in existing product offerings, while new options are considered.
In addition, given many members are not engaging with their pensions at the right time or are being overwhelmed at retirement, there has been discussion on the implementation of default retirement options. As part of this, we see schemes and trustees having to create default options as part of their fiduciary duties, which should drive further evolution.
For example, 79% of L&G members who retired in 2023 with large pots went into drawdown. But annuities have also seen a rise in popularity in the last few years as members retiring weigh up recent market volatility and more attractive rates – 11% of members with large pots retiring in 2023 went into annuities, versus 3% in 2021.
Is there more than can be done to better service DC members in retirement?
Yes – we think a number of developments are required to better serve members. First of all, simpler language in communications – with the use of pension jargon being banished – would help members understand their options.
More personalised experiences for members are also necessary, rather than a one-size-fits all approach as this can often compound challenges for members.
We also favour the introduction of targeted support to better support members, as well as clear options at retirement – with access to guidance and/or advice. And we think much better use can be made of technology, including the Pensions Dashboard, to support members.
What role does technology play in helping members to make decisions in retirement?
Technology has become a key enabler to driving a more personalised, omni-channel experience for members. This is particularly relevant for members at retirement, where retirement planning varies from individual to individual. As I noted above – a one-size-fits-all approach really compounds confusion.
Tech is helping us drive more personalised engagement with members, throughout their journeys with us. For example, we can harness data-driven insights and signals to better understand and predict decision-making needs. This powers the personalised experiences that consumers have come to expect.
And with the advent of open banking, the Pensions Dashboard and targeted support on the horizon, there’s a significant opportunity to help members make more holistic decisions around lifetime savings to fund later life, with a focus on financial wellbeing and financial resilience across a member’s lifetime.
Should there be a default option for members at retirement?
Retirement decisions are very personal, so a uniform approach isn’t necessarily the optimum solution. However, we do recognise that the government and industry bodies are looking at how default options can support members. Should default options become a reality, we think their design will need really careful consideration.