The group will shortly be writing to advisers of schemes in which the default fund is invested in lifestyle investment strategies geared towards turning savings into an annuity which provides a regular income between the ages of 60 and 65. This will alert them to correspondence with employers and scheme members to give three months’ notice of the move to a fund which is targeted at flexible access in retirement.
Under the lifestyling approach, pension funds are typically invested in riskier, higher growth assets when the saver is young, but progressively moved to less risky investments, such as cash or fixed interest, five to 15 years before retirement. In the new pensions environment, however, Scottish Widows has found that around only 25 per cent of customers are opting to take an annuity, making this investment approach unsuitable for the majority.
Ronnie Taylor, Scottish Widows Pensions Director, said: “For customers to make the most of the new freedoms, they really need to think about the way they want to use their pension fund in later life at least five years before their retirement date and ensure they pick an investment glide path to accommodate it.
“But despite our best efforts to draw attention to the issue, many customers remain disengaged and, where this is the case, we believe it’s important and in their best interests to take action on their behalf.”
Scottish Widows recognised early on that customers’ retirement journeys would change following the introduction of pension freedoms and created a series of lifestyle investment options – Pensions Investment Approaches (PIAs) - for customers approaching retirement.
These options were launched in April 2015 to coincide with the introduction of the new freedoms. Customers can select glide paths which reflect how they intend to use their pension pot in retirement, whether it’s taking a fixed income, encashing or going into drawdown/remaining invested.
Taylor continued: “Unlike many other providers, our products have been designed in a way that allows us to make changes as part of annual governance reviews, which has enabled a bulk switch to a more appropriate default fund.
“We have been studying customer behaviour since the introduction of the freedoms and when it became clear that the majority of customers planned to remain invested or to use drawdown, we decided to change our default option accordingly.”
Customers who plan to follow an alternative retirement journey, such as full encashment or purchasing an annuity, can opt out and will be assigned the investment approach appropriate to them. Those who are within five years of retirement will remain in their current default fund unless they opt to switch.
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