Nearly one in five (18%) UK consumers of working age are not planning to pay into a pension at all or have not yet considered doing so. Even more worryingly, 38% of consumers find pensions confusing and complicated to understand, perhaps exasperated by the increased complexity of pensions Key Features Illustrations (KFIs) as a result of the regulator’s drive for greater transparency around charges. Encouragingly for IFAs, four out of five of us (79%) would seek financial advice before investing in a pension.
These findings came from the Dunstan Thomas-commissioned UK-wide consumer survey which was conducted by Lancaster University Management School during September. They also come at a time when the Government is understandably concerned about increasing the public’s engagement in saving for retirement as more than 1.6m employees were enrolled into an auto-enrolment (AE) pension scheme within the first year of AE just completed.
New AE pension scheme holders and their employers will need to be persuaded to pay more than the statutory minimum monthly contributions, if AE scheme holders are to build a living income for retirement. The roll out of AE comes at the same time as the financial services regulator has forced more than a quarter of financial advisers out of the market through increased regulatory burdens associated with the Retail Distribution Review (RDR).
Dunstan Thomas commissioned the Lancaster University study to probe levels of understanding of pensions terms and calculations commonly provided in KFIs today. Dunstan Thomas will use the intelligence to explore the potential for a new breed of retirement planning tools to be made available through Direct to Consumer (D2C) platforms. If successful these tools could stimulate greater understanding, engagement and investment in retirement products.
Target Income required for retirement was considered the most valuable feature of any pensions illustration, receiving a weighted average of 8.31 out of 10. Whilst quoting of the 25% Tax Free Lump sum to be received at retirement, was the next most useful figure for consumers (with a 8.27 weighted score); and the value of the pension fund at a projected retirement date was only marginally less important (8.07). Illustrating Basic State Pension entitlement at retirement fell behind that (7.66). Cost of delay (in starting a pension) was the least understood and valued aspect of any potential online pensions illustration (6.9).
More than half of consumers (55%) want to see both standard and inflation-adjusted values for their pensions so they can properly understand the buying power of their pension at retirement. Only 15% were content with standard values alone; while 26% favoured quoting only inflation-adjusted values in pensions illustrations. The Financial Services Authority’s Policy Statement on inflation-adjusted personal pensions (PS13/2) gives product providers until 6th April 2014 to publish inflation-adjusted projections on KFIs.
The most valuable visual aid within any online pensions illustration would be one that clearly illustrates the difference between target income (i.e. what income scheme holder would like to retire on) and projected income (i.e. what he/she will actually receive given current pension funds and contributions). This received a weighted average of 8.22 out of 10.
Showing the age scheme holders will be able to retire, based on target retirement income and current savings, was considered the next most useful visual aid (with 8.04 score). Seeing the amount of Tax Free Cash they would get out at retirement - based on investing specified regular contributions - was of lesser importance (with 7.56). Showing the cost of delaying investing in a pension for a number of years was considered the least valuable visual aid (6.89).
Many expressed concerns about standard industry terms which are well-understood inside the industry but rarely fully comprehended by consumers when they read them in pension illustrations document. The survey probed consumers’ understanding of specific terms: 8% had no comprehension of the importance of knowing about the value of the Tax Free Cash lump sum at retirement and nearly the same number (7.6%) failed to grasp the value of Target Income. Reassuringly given the current focus on charges disclosure, 90% of the sample wants to see charges detailed on online pensions illustrations.
When asked what they would do if their pension failed to hit target income level, nearly a third (32%) said they would work part-time past their planned retirement age and 21% said they would continue working full-time. A significant minority said they would draw on equity tied up in property or ISA savings to supplement any pensions shortfall. 4% had no back-up plan.
Natanje Holt, managing director, Dunstan Thomas, commented on the findings:
“This new consumer research shows that both the industry and the Government still have some way to go to engage people in preparing financially for their retirement and we think there is a significant and growing part of the population that have turned their back on pensions altogether. We believe part of the answer is to support consumers in building their understanding of what’s possible through online planning and illustrations tools and D2C platforms could be leading the way here.
“But all will not be plain sailing for D2C platforms in this market: the survey also reveals that most of those prepared to go online (to gather information and do retirement planning exercises) still want to consult a financial adviser before taking the plunge. This then leaves the question will they be able to afford the fees for this valuable financial advice in the post-RDR regime?”
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