PLSA research shows room to be positive about freedom and choice though education challenges remain. Helen Morrissey takes a look
- PLSA research shows roughly 400,000 people took action on their retirement income
- Many of those who said they purchased an annuity may not have actually bought one while the amount of money going into savings products like cash ISAs is a concern
- Only 18% of those who took their entire pension fund as cash spent it all
The pensions freedoms that came into force last April give retirees unprecedented access to their retirement savings. In the run up to introduction there had been concerns of a widespread dash to cash with savers raiding their pension pots.
Research from the Pensions and Lifetime Savings Association (PLSA) allays these concerns by showing no dash to take entire pension pots as cash. However, it does highlight significant education challenges around helping people better understand their options.
Pension Freedoms: No More Normal is the third in a series of research projects undertaken by PLSA. Baseline research was carried out in March-April 2015 with further qualitative analysis carried out over the summer on those who said they wanted to make a retirement income decision. A follow-up study of 2000 participants was carried out in October 2015.
The sample was split between actioners (14%) who had actually made retirement income decisions - the PLSA said the "actioners" account for around 400,000 people. The remaining sample was split into investigators (63%) who were researching options and the inactive (23%) who had yet to do anything.
Of those who had taken action only 14% had taken cash. This runs counter to early concerns that the freedoms may encourage many retirees to take their entire pensions as cash.
Over a quarter (27%) had gone into drawdown while 37% had only taken tax-free cash. According to the research, 20% of those who had taken action chose to purchase an annuity which is higher than first thought. However, PLSA's head of policy and research, Jackie Wells said this number may come down to "confusion over the terms" and many might have purchased a different retirement income product.
Of those who took cash the research shows that 18% spent it all while 57% chose to save or invest some and spend some. Almost one in five (19%) saved or invested it all.
Of those who said they had purchased an annuity more than four in ten (42%) used their existing provider while only 11% used the internet to shop around.
Making good decisions
While the results suggest the majority of those taking cash were not reckless spenders the saving and investment decisions taken do raise concerns. One in five chose to put their cash into a cash ISA while a further 23% put their money into a savings account. Only 19% put their cash into a shares ISA while 8% invested in property.
Speaking at the report's launch Aberdeen Asset Management's head of retirement savings Gregg McClymont said the results shine a spotlight on how retirement income products need to evolve.
"If you are putting money into cash ISAs then that is not an investment decision, it is a savings decision," he said. "This indicates the products developed for the mass affluent part of the population need to focus more on managing volatility rather than the income generated. Products like variable annuities can be seen as viable in terms of what people want but the cost of derivatives makes them very expensive."
The Association of British Insurers policy director Yvonne Braun said more needed to be done to engage people with their pension savings.
"We have to engage with people more and steer them towards guidance as people need a lot of help," she says.
"Take up of Pension wise needs to be much higher and advice needs to be made more accessible. The Pensions Dashboard would really help people here as it would help them get an overall sense of their net worth financially."
Giving people options
Helping people get to grips with financial terminology and the products on offer will go some way to helping people get the retirement income solutions they need. Wells said one aspect highlighted in the research was that the journey for many looking to access their retirement savings was not always an easy one.
"Looking at the experiences of the "investigator" group of the research shows that they have experienced a far from linear experience," she says. "We asked participants to keep life logs of their experience and for many it was a very stop/start process event for those who in April thought they had worked out what they wanted to do. By September very few had actually done what they expected."
Clearly the employer has an important role to play in helping people get to grips with their retirement decisions. However, many are hamstrung by the concern they may be seen to be veering into providing advice. PLSA's Wells acknowledged these difficulties.
"It is important that we look at what can be done in this area," she said. "We would like to be able to say to those who want to go further than the bland leaflets saying ‘Go to Pension wise' that they can do that without fear of litigation."
So the PLSA research shows evidence of good decision-making among the first cohort of retirees taking advantage of freedom and choice. However, significant education issues remain in terms of understanding the options available. If this can be addressed then the future for retirement post freedom and choice looks bright.
More than half of BlackRock’s flagship UK defined contribution (DC) default fund’s assets will be invested in ESG strategies by June 2021.
Graeme Bold says the right communications can improve both the level of savings and the outcomes for savers.
More than half of UK savers agree they are unable to save sufficiently to achieve the retirement they want, according to research by BlackRock.
Pension savers have held off from making changes to their pensions despite nearly half having been impacted by the pandemic, research finds.