The Association of British Insurers has published a report entitled Future Proofing The Freedoms: Supporting Customer Decisions About Pension Withdrawals. The report indicates widespread concern amongst pension providers about the ways consumers are choosing to access their pension savings. Furthermore, large numbers of people are making decisions on how to access their pots without receiving professional advice, or even consulting the Pension Wise guidance service.
The ABI comments that a DIY approach here is potentially problematic as it requires consumers to understand key concepts such as the impact of inflation, taxation considerations and how long the funds in the pot might need to last. Making a full withdrawal at an early age is also a worrying trend, the report says, as many retirees might then leave the monies in low-interest cash savings accounts.
It also believes the problem is likely to get worse in the future. At present, many retirees can rely on a guaranteed income from a defined benefit scheme to mitigate any concerns about unsustainable withdrawals, but future generations are likely to have only defined contribution provision in most cases. At present, 49% of people aged between 50 and state pension age with defined contribution pensions have no defined benefit provision.
Between October 2019 and March 2020, 65% of those making full withdrawals did so without receiving advice or guidance, compared to just 27% of those entering drawdown. Of customers who chose drawdown, 63% did so after seeking regulated advice.
Receiving ongoing advice once a drawdown arrangement could also be important. The report cites Pensions Policy Institute data showing that, with a 3.5% withdrawal rate, there is only a 10% chance of the pension pot being exhausted prior to death, but this probability rises to 50% at a 7% rate. 56% of all pots currently have a potentially unsustainable withdrawal rate of 6% or higher. Yet how would a customer who doesn’t have access to an adviser know how quickly to withdraw their funds?
Recommendations from the report include:
- Consumers need to understand key concepts such as what a sustainable income could look like
- Providers have an important role in providing tailored information to customers
- Regulated advice also has a vital role to play
- Providers could be required to make automatic appointments with Pension Wise for their customers
Yvonne Braun, Director of Long-Term Savings and Protection at the ABI, said:
“We need to act now to protect future retirees. Future retirees will be far more dependent on their defined contribution savings than current retirees, the great majority of whom have defined benefit pension income. This means the decisions they make about their pension savings at retirement will be even more critical. But we know 72% of people are unwilling to pay for financial advice and only 14% of retirees are using PensionWise.
“We need to create an environment where people have far more support when taking decisions about accessing their pension. This includes both increasing the number of people accessing PensionWise and enabling providers to offer more help. The report shows providers can and want to do far more to help customers, but to enable them to do it, we need a change to the rules around advice and guidance.
“Now is the time for the Government to act so the majority and not the minority of pension savers get the support they need so they can make the most out of their retirement savings.”