The Pension Freedoms legislation introduced in April 2015 enables individuals to flexibly access their DC pension pots from the age of 55 and use the funds for a wider range of options than had previously been available.
These include cash withdrawal, retirement income products, or a combination of options. Since the introduction of the policy, over £37 billion of taxable flexible withdrawals have been made from DC pensions (source: HMRC Flexible Payments from Pensions, July 2020), and most commonly this has been full or partial cash withdrawals, followed by drawdown products that have been taken out but not fully withdrawn.
To support consumers in making their choices under Pension Freedoms, the government introduced Pension Wise. But evidence suggests that a considerable proportion of consumers, particularly those from low income households, are taking decumulation decisions without accessing free information or guidance or seeking professional financial advice.
The FCA 2017 Retirement Outcomes Review found that the proportion of consumers purchasing drawdown products without advice rose from 5% before the Pension Freedoms legislation to 30% in 2016. The report raised concerns that over half of the fully withdrawn pension pots were not spent but transferred into other savings or investments, sometimes due to a mistrust in pension products, and clearly this is counterintuitive as to the purpose of government incentivised pension saving.
The DWP therefore commissioned research to conduct a large qualitative study to better understand the behaviours around members’ motivations and decision-making processes in drawing benefits from their DC pension savings. The research will support wider work by the DWP to inform policy decisions relating to planning and preparing for later life.
Most participants were aged 55 to 65 to capture the experiences and views of those who were approaching retirement. Over half of the sample were selected because they had accessed their DC pension pot, which enabled the DWP to explore their decision-making journeys. This was compared to a smaller group who had left their DC pot untouched. The study also included a group of people aged 50 to 55 to gauge their awareness of the Pension Freedoms and their intentions as they approached the age at which they could access their benefits.
When thinking about their retirement lifestyle participants considered the following important:
Of concern, beyond these general aspirations there was little evidence of people giving detailed consideration to the length of their retirement or the level of income or wealth they might need to support themselves.
Participants tended to hold optimistic views of the likely adequacy of their retirement income and of their ability and opportunity to work up to their chosen retirement age.
Among those who decided to decumulate their pensions, their stated rationale for doing so fell into 4 main categories:
It is only the latter that falls into the category of the role pensions were originally designed to fulfil, so the arrival of Pension Freedoms has created a quantum shift in how members perceive, and then use their accumulated DC pension savings.
The research looked at how pension decumulation decisions are driven by a complex array of attitudes – shaped by circumstances, perceived capabilities, beliefs, values and dispositions – in the context of the Pension Freedoms policy. By definition, given the sampling focus on those who had decumulated, most participants were aware of the options under the Pension Freedoms policy through media coverage, colleagues or communication from their pension provider. However, those who had not accessed or had only made a cash withdrawal were less aware of the retirement income options available.
It was found that whether an individual went ahead with accessing their pot(s), and in what way, depended on a complex interaction between their circumstances, personal beliefs, values and capabilities.
As noted above, a key point is across these groups people consistently viewed their DC pension more as a component of their overall savings from which they may draw, rather than specifically reserved for the purchase of an income product in retirement.
Those who had not accessed their pensions might not have had the financial need or aspiration to consider doing so yet. But there was also evidence of participants whose pension pot was primarily their source of retirement income. Interestingly, some in this group were reluctant to seek information, guidance or advice about their options for fear of being tempted to access it early, rather than waiting until they had actually retired.
A group of participants acted on the basis of no support or minimal information and guidance. Where these participants reported high perceived financial capability, they knew what they wanted to do and simply wanted information on how to operationalise their plans. Others did not seek advice because they were wary of the complexity of pensions decisions and proceeded to decumulate despite lacking confidence in their understanding of the consequences.
For those on lower household incomes, the perceived cost of personal financial advice could be a barrier to seeking professional advice, while others were put off by the perceived burden of engaging with support on top of busy lives or health conditions.
Participants with all levels of perceived financial capability could also present a mistrust of financial advisers and the pension industry as a rationale for their decision making. This could either underpin not seeking advice or not acting on the advice.
Forecasting the arrival of the Pensions Dashboard, when asked what support would be helpful, participants expressed a desire to have more information and guidance across all their pension pots in one place.
A key learn was the research found consumers in different circumstances who might be taking potentially detrimental decumulation decisions without seeking guidance or advice. Consumers need different types of support to navigate the guidance available and encouragement that the time and cost they might have to invest in advice will help them make the most beneficial decisions.
At PS Aspire, we fundamentally believe in the invaluable benefit of helping pension savers as they are accumulating their pension pots to increase their understanding of how the pension rules operate, and the options that will be open to them after age 55. Furthermore, then giving them easy access to impartial guidance to help with the conversion into taking benefits in the best possible manner, is embedded into our proposition.
The outputs from the DWP research corroborate our belief that members need well presented, easily accessible, and reliable guidance and advice.
For more information on how we can help, please contact your PS Aspire consultant.