As we enter the new world of pension freedom, the majority of next year’s retirees will not be raiding their pension pots despite the freedom to do so. But, with the new rules coming into effect in less than seven months, many have yet to make a plan on how to make the most out of their hard earned retirement savings.
These are the findings of new research commissioned by Fidelity Worldwide Investment, which has today launched its ‘Class of 2015’ report – a unique insight into the first group to face the choices of the new retirement revolution from April 2015.
Surveying a panel of 500 people retiring between April 2015 and March 2016 about their plans, hopes and worries, the report aims to build a picture of this group’s retirement plans for April 2015 and beyond.
Strikingly, the research shows that, contrary to fears by many that retirees will cash in their pensions in full, the Class of 2015 is actually more prudent, with just 6% planning on taking all of their pension pot as a lump sum. And, while half (54%) say they will take at least some of their pension pot as a cash lump sum, over a third of these retirees (37%) plan to take only the tax free portion available to them today.
Prudent savers – but women trail behind
The findings of the report reveal those in the Class of 2015 are happy with the prospect of retirement, believing they are luckier than both past and future generations of retirees. The figures back up this fact; the Class of 2015 is a well provisioned group, with an average pension pot of £115,845, made up of a mixture of Defined Benefit and Defined Contribution workplace pensions, as well as SIPPs.
There is, however, a significant disparity between men, whose average pot is £160,776, and women, whose average pot is just £67,857. Despite the gender imbalance, the vast majority of respondents, 74%, say that this is the pension pot they expected to accumulate by retirement.
What will the Class of 2015 do with their hard-earned savings?
According to our research, annuities still have a place in the post-Budget retirement landscape, despite the low rates currently on offer. Of the majority who are not taking their entire pension as a lump sum, 23% think they will transfer their pension pot into a drawdown pension, 18% will use a combination of a drawdown pension and an annuity, 16% will take an annuity only and a further 16% will leave their pension invested for growth and defer taking it.
However, this clarity of thought is contradicted in our research as just under half (48%) said their knowledge of the new pension rules were good, suggesting the rest had a lack of knowledge of the rules which could hinder their ability to make the right choices. This is backed up by the fact that around a third of these retirees who said they would withdraw all or part of their pension pot to place it in either a savings account, a current account or a cash ISA (37%) where interest rates remain at all-time lows.
Class of 2015 retirement choices
- 54% are planning to take at least some of their pension pot as a lump sum
- 37% plan to take the tax free cash lump sum
- 11% plan to take the tax free lump sum plus some more
- 6% plan on taking all their pension as a lump sum
Of those who are not taking all of their pension as a lump sum
- 23% will transfer their pension pot into a drawdown pension
- 18% will use a combination of a drawdown pension and an annuity
- 16% will purchase an annuity
- 16% will leave their pension invested for growth and defer taking it
Planning for retirement
With only seven months to go until the new pension freedoms come into effect, our research suggests the Class of 2015 are in no rush to plan their retirement finances. Only 17% say they have a clear plan in place and have done extensive research into their retirement income options despite having a view about what they might want to do.
One in seven (15%) are reviewing their existing retirement plan as a result of the Budget changes while one in four (26%) say they are waiting to see what happens after the new pension rules come into force before they draw up a plan.
Looking ahead to the next 12 months, three-quarters (75%) say they will look to use at least one source of advice to inform their decisions, an increase on the 67% who have done so already. Just over one third (35%) will seek the help of an IFA, 21% will turn to friends and family, while 20% will go to their pension provider for guidance.
Fidelity is urging this first generation of retirees under the new pension freedoms to start thinking about their options now to ensure they have a plan in place to achieve the best retirement outcome. Researching how to access pension savings in a tax efficient and timely manner will be time consuming. While many will want to take advantage of the new pension freedoms as soon as they come into force in April 2015, it is essential to do the groundwork beforehand so that they fully understand which choices are available.
Alan Higham, Retirement Director at Fidelity Worldwide Investment, comments: “With greater freedom, comes greater responsibility. We urge people to start their retirement planning now, rather than waiting for the new rules to bed down. Planning your income in retirement doesn’t have to be painful but it’s important to engage early on and seek advice to ensure that retirement income is accessed in a timely and tax-efficient way.
“While the research shows that annuities still have a role to play, it’s clear the Class of 2015 don’t just want to get access to their cash in their pensions quickly. They want to take advantage of the freedoms to mix up what they do with their pension pots. For example, staying invested and drawing an income or leaving it invested for longer are now on the cards for a significant group.
“We know that our Class of 2015 are not reckless, they are minded to make sensible choices, which require making a plan and getting advice if needed. Organisations such as the Money Advice Service or The Pensions Advisory Service can be an invaluable source of impartial guidance. Likewise an independent financial adviser can examine your entire potential income to ensure you get the best value. Come April 2015, there will be many millions seeking to access their pension pots.
By preparing for the new pension freedom and being aware of which products best suit their individual needs, the Class of 2015 can confidently proceed, making the most of the changes and securing the future on their terms.”
Fidelity’s Retirement Service is designed to help people get the most out of their retirement savings, and help advisers and employers guide their clients and employees to the best retirement outcome right now.
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