Have pension freedoms been a success? The data is mixed. A report by State Street Global Advisors, in conjunction with The People’s Pension, has revealed varying outcomes for the first guinea-pig generation allowed access to their retirement savings.
The survey spoke to savers aged between 55 and 70, who are reliant on defined contribution pension pots between £30,000 and £150,000 to provide an income in retirement. This is the first generation of pension savers eligible to take a 25% tax-free lumpsum at 55 from April 2015, with the option of accessing all of their savings at retirement – although there are income tax implications for doing so.
When pension freedoms launched in April 2015, State Street and the People’s Pension commissioned Ignition House to conduct a report following a group of 80 retirees and how they responded to the policy changes.
Of the survey respondents, a fifth cashed in their entire savings, citing control as the main factor. Despite getting little to no return on cash, it was the preferred asset class because it is seen as more tangible, with one woman saying; “a bird in the hand is worth two in the bush”.
Janette Weir, director at Ignition House, said that for many risk averse retirees cash seems the most sensible option.
“These retirees have chosen to be their own investment managers. We know there is longevity risk and inflation risk with keeping your savings in cash. But they see it as taking ownership and control of their future. They are happy to pay tax too, as cash for them is tangible, accessible – unlike investing in the stock market,” she said.
Many of these retirees who withdrawed their savings have kept their pot in high-street bank cash accounts, while others have opted to invest it themselves; one in peer-to-peer lending schemes, another in Indian equities. Another man has invested heavily in gold coins which he keeps at home.
For other risk averse retirees, annuities were deemed the best option, but this was only a small proportion, and those that bought an annuity in 2016 this year revealed they regretted the decision.
Weir revealed that one respondent had returned to work after retiring and purchasing an annuity. Her annuity income combined with her wage had pushed her into the higher tax bracket, which she was unhappy about and regretted purchasing the annuity.
However, when asked what these annuity holders would rather have invested in, there was no preferred alternative.
“Those who regretted their decision, and those respondents who still, two years on, are not sure what path to take, highlight that there is a need for a default post-retirement option,” said Weir.
“Thanks to the survey these people are among the most engaged of retirees – and if they are struggling to make a decision, how will the less informed fare? As there is a default pension scheme while you are working and saving, there needs to be a default post-retirement option, perhaps part annuity, part drawdown.”
Some savers expressed that – contrary to former Chancellor George Osborne’s initial comments at launch – pension freedoms were not a good thing; choice complicated and confused.
“When you had to buy an annuity, you kind of knew there was no choice, and when you have to go down a certain route it is easier,” one male retiree said. “Now, I have all this choice; do I take my money somewhere else and how do I know these are the right people?”
Present Bias Governs Financial Decisions
The biggest influence on the retirees financial decisions was found to be a change in current circumstance; family health issues, a child’s wedding, ailing parents or even property renovations. These concerns ranked higher than long-term financial obligations, proving that present bias does not end with the Millennial generation. Many respondents struggled with being the sandwich generation; financially responsible in some way for both adult children and elderly parents.
Alistair Byrne, Head of European DC Investment Strategy at State Street said that this highlighted the need for retirement products to be “flexible and adaptable”, and evolve with the investor as their needs and circumstances change.
No Regrets on Tax-free Lump Sum
A fifth of the respondents took advantage of the 25% tax-free lump sum available to pension savers over the age of 55. Of these, some annuitised the remainder, but most left their pension invested in their scheme to access at a later date. The cash lump sum was used to fund holidays, home improvements – including a hot tub for one, and purchasing secondary properties.
One woman in her 60s, said: “We have been on a few holidays including one to Tenerife. We want to enjoy our retirement."
Another man in his 60s added: “I have bought an Audi A1, topped up my cash savings and been to Portugal. I’m very happy.”
