Work and Pensions Committee
The work and pensions committee report, protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings, came up with a number of conclusions.
• Many people seem unwilling to pay for financial advice for the decisions they make about their pension savings.
• The Government and regulators need to enable savers to make their own decisions, ensure that they don’t default to a decision against their best interests
• Savers need more support than they currently receive in order to make good decisions about how they access their pension savings
• Many would benefit from choosing a mix of annuities, lump sums and drawdown rather than a single product
How are these being supported and what can be improved?
Lots of retirees access the pensions freedoms, but do not take expert advice. We can debate the reasons why this is the case, but we know it is a fact. So how can those who do not take advice be helped?
What do people want in retirement?
In very simple terms:
• An after tax income, perhaps with some lump sums, that they want for the whole of their retirement
• A legacy payment to pass on if desired
To achieve these, they won’t just be using their pension pots on their own. They will use them along with everything else they may have, including state pensions, old final salary pensions, ISA’s and any other non-pension savings and income they may have.
What help do they need to get the best outcome?
• Understanding the basic terms and options available
• A suitable investment portfolio
• A sustainable withdrawal plan that is designed to avoid running out of money
• The best mix of products
The basics - Pension Wise (MoneyHelper) is a well-regarded free service which provides just this, to those that use it. It familiarises retirees with pension terms and options available to them that can be used to support a retirement income.
Investments - There are many ready made investment funds designed to be suitable for individuals using the pension freedoms. These are popular and retirees appear happy to choose one “off the shelf”. They are essentially happy to rely on experts to build this for them.
For these first two points then, help is there and simple to access for the unadvised.
Withdrawal plan - Here there is virtually no support for retirees. Basic rules of thumb exist, such as guidance to take a maximum of 4% of your fund each year to make it last, however these offer no practical help.
Why? As we said earlier, each and every year there will be different parts making up the retiree’s income depending on everything else they have. There is simply no universal magic number like 4% a year. The amount needed from the retiree’s pensions pots is different every year, to get the best outcome.
Instead of magic numbers, what if we could support retirees with the tools to build and track a plan themselves, using different amounts in each year, then pay the plan automatically?
Ad hoc withdrawals could be taken when wanted and annual changes of the long term plan would be possible (or it would continue by default). The benefits of flexibility are therefore still maintained, but the base automated payments help protect the retiree from running out of money.
Product mix - Using pension pots as drawdown income only in retirement isn’t the best option for many retirees. By building a plan, monitoring it and paying it automatically, this naturally lends to understanding which other pension and non pension products can support the retiree.
As simple examples. If the retiree has more than enough expected funds to provide what is needed, some of the pension pot can be used to secure a guaranteed income (annuity).
If there is not enough to support the future income needed, other later life products such as equity release, can provide the additional income needed to support the overall figure needed.
In summary, basic help and support on investments is already well provided and easily accessible, but key elements to a good outcome are missing.
Providing the tools to build and track a withdrawal plan, automating payment and introducing other suitable products to support any plan, will provide the missing elements needed.
Kevin Hollister, is a pensions actuary, founder of Guiide and Guiide DB and contributes to the Institute and Faculty of Actuaries working party on decumulation.
|
