In-depth, qualitative research from Ignition House, commissioned by syndicate members AXA Life Invest, Friends Life, LV= and NEST, has found that UK savers lack basic understanding of how pensions and investments work, but are quick to adopt more positive attitudes towards pensions once the benefits are fully explained to them. Participants understood the advantages of being able to put money aside for the longer term, especially as they will now be able to access the money more easily at a point when they need it.
However, UK savers’ lack of awareness of pension products and their tax benefits expose a need for the industry to bridge the pensions knowledge gap and take active steps to deliver retirement products tailored to UK savers’ needs.
Tax implications
UK savers’ understanding of how their money is taxed was low to non-existent: not one participant understood what ‘taxed as income’ meant or what ‘marginal tax rate’ was. Most participants did not understand the concept of the tax-free lump sum: how much they could take and how this would be taxed. The ability to take some of their pension savings as tax free cash was commonly recognised, but the participants were unclear about the exact amount that could be taken, with responses ranging from ‘somewhere around 20%’ to ‘a fixed lump sum of around £10k.’
Property vs. pensions
Participants held positive associations with property, buy-to-let, ISAs and deposits, but found pensions confusing, difficult to understand and full of industry jargon, while some even felt they would be better off putting their money ‘under the mattress.’ Downsizing was seen as the best way to release funds to boost retirement income, but many participants did not understand the tax implications of releasing funds by selling off their buy-to-let properties. Indeed, many participants believed that the tax treatment of buy-to-let would be better than tax treatment of pensions, exposing a worrying gap between people’s perceptions and the reality of tax rules.
Demand for guaranteed income
Many respondents had not heard of an annuity and beyond this, there was confusion about annuities and how they work. There was a general perception that annuities were ‘bad,’ ‘poor value for money’ and a ‘rip off.’ Awareness of alternatives to an annuity was limited to non-existent. However, when asked what they most valued in a retirement product, the majority of participants rated ‘the security of a guaranteed fixed income until you die’ highly, showing that the certainty and security of a known income in retirement remains important for pension savers.
Simon Smallcombe, Managing Director of AXA Life Invest, said:
“This research shows that people’s understanding of pensions is so low – and their preconceptions so negative – that they cannot be left to fend for themselves. UK savers need help along the road to retirement with well-timed and clearly signposted guidance and advice.
“We need to re-define pensions as a savings vehicle to get an income in retirement – and simplify the language used to describe pensions, whether they be personal pensions, defined benefit or defined contributions. At the same time the Government needs to create a level playing field so that all retirement products are treated the same when it comes to tax.”
Colin Williams, Managing Director of Corporate Benefits at Friends Life, said:
“We welcome the changes that the Government is making to pensions which will provide consumers with more flexibility in retirement. We believe it is extremely important that customers have the right information about their retirement savings so that by the time they receive guidance, they are well-informed of their choices.
“It is clear that consumers need support from a number of sources to help them understand their options and so they can make good decisions that will affect their financial wellbeing for the duration of their retirement.”
Philip Brown, Head of Retirement Propositions at LV=, said:
“Deciding how to take an income from your retirement savings is arguably one of the biggest financial decisions someone will have to make. It is crucial that those approaching retirement have the information needed to make an informed decision. We recognise the value of advice and it is clear from this research that it could have a positive impact on the financial outcome for many retirees.”
Tim Jones, Chief Executive of NEST, said:
“These findings very much chime with our own recent research which found younger people in particular don’t understand what happens to their money when they pay into a pension. This report confirms that even closer to retirement age, workers still don’t know what they can expect from their pension savings or how to make the most of their pot.
“Automatic enrolment is making pension saving a truly mainstream activity. We can’t expect millions of people to become tax and investment experts overnight when even those wealthier consumers who’ve had more experience of pensions don’t really get them.
“The government has just announced that everyone will now have access to independent guidance ahead of retirement to help them navigate some of these issues. But it’s also vitally important as an industry to make sure we listen to our members, understand their needs, fears and wants, and tailor products accordingly. We need to make sure we can deliver the best outcomes for people even when they lack the confidence or knowledge to make active choices themselves.
“That’s why NEST is planning to consult in the autumn on what we can do to assist our membership on the run up to and through retirement, such as by providing different investment journeys and post retirement vehicles.”
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