Pensions freedom could actually lead to pensions captivity as confusion at retirement lock thousands of savers into poverty.
A new report by the Pensions Policy Institute has found that the complexity of pensions is resulting in savers making ill informed decisions at retirement – and living to regret the implications. Currently those without significant personal savings have to buy an annuity. This decision was quite literally a once in a lifetime opportunity which determined a retiree’s income for the remainder of their life. Executed badly, and your income would be a monthly reminder of your poor financial decision.
From next April, on retirement, workers will be allowed to choose what they do with the pension pot they have accrued – whether to draw it down in one lumpsum, take several chunks at intermittent periods or buy an annuity. While these freedoms have significant benefits, not least because they annuity market in recent years has tanked in line with falling interest rates, the range of choices means that there are fears pensioners will be overwhelmed and not make the most of their money.
Currently on retirement many people choose to buy an annuity from the same company they have been building up their savings with. But they do not have to do this – you can exercise your open market option. Pensioners who do not exercise their open market option and shop around for an annuity before fixing the rate at which they will receive retirement income could be penalised by 31%, according to figures from the Association of British Insurers (ABI).
For someone with a pension pot of £180,000 this means the difference between receiving £11,000 a year and £8,400 a year. Over 25 years that would be an extra £65,000.
Evidence suggests that savers prefer to take the easy decision of sticking with the same pension provider - but what does this imply for the future of the pensions market?
“The changes mean that now, and particularly going forward, people contemplating a work or pensions transition can in some cases face an array of options such as when, how and whether to retire; when and how to take state and private pensions; and when and how to access non-pension savings and assets,” reads the PPI Report.
“Each transition has several options within it and there are myriad ways to combine them. However many work and pension transitions are involuntary, such as those triggered by ill-health or redundancy. Not everyone has a range of assets and savings to depend on in retirement and for many there may be strong defaults dictating how they retire.”
The report asked workshop participants to major financial decisions by the difficulty of making an informed financial decision on each. Accessing savings from a defined contribution workplace pension – the type of pension that auto-enrolment is placing millions of employees into – came top.
As part of the new pensions landscape workers will be offered non-compulsory free advice called Guidance Guarantee on retirement to help make clear the choices available to them. But as the advice is optional there are worries it will not be enough to ensure all retirees make sufficiently informed decisions.
Alan Higham, Retirement Director at Fidelity, sponsored the PPI report, said it was the responsibility of pension providers to educate savers.
“We believe it is incumbent on the whole industry to use its expertise to help consumers make good decisions and not allow their customers to sleepwalk into bad decisions,” he said.
“Come April 2015, consumers need our help, expertise and access to high quality advice more than ever and the industry must work with the FCA to create as many good outcomes as possible.”
