Older savers are at risk of running out of their defined contribution (DC) pension savings with a third of their retirement still ahead, according to research by The People’s Pension and State Street Global Advisors.
The New Choices, Big Decisions study, which looked at people's retirement planning and spending habits since the introduction of the 2015 pension freedoms, mean many could end up having to spend their final years relying on the state pension.
The research, conducted by Ignition House, also found people facing retirement wanted their pension provider to give them a safe guided path into retirement instead of the complex array of decisions they are currently having to make.
The 50 savers, including 30 people who took part in the first study in 2015, were either approaching retirement or had already finished their careers.
Two-thirds were spending their pension savings at a speed, which means they will run out of money in their early to mid 80s, even though many will live into their 90s.
Policymakers and the industry have built a system that could only work effectively based on unrealistic assumptions as to how people behave, according to the research.
It found savers are scared of planning for the future as they do not want to discover the ‘truth', they underestimate the financial risk of growing old and do not understand how inflation can impact their savings. Also, the typical saver will not leave a product or change a drawdown withdrawal rate once they have signed up.
B&CE's director of policy and external affairs Phil Brown said policymakers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for.
He added: "There is evidence that a significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided. People would be dismayed to arrive at a car dealer's forecourt to buy a car, be presented with a selection of parts and told to a pick a selection and build their own vehicle, so why do we expect pension customers to do exactly this?"
The research shows the sheer number of challenges that older savers face when making a decision about their pensions, said State Street Global Advisors' Alistair Byrne: "People struggle to see beyond the near-term future and cannot always access the type of advice and support they would like. As an industry we need to continue simplifying what we offer, providing guidance and support, and easy paths to follow, whether we call them ‘defaults' or not."
Former pensions minister, Baroness Ros Altmann, said while the report's findings do not suggest problems with the principles of the freedoms, they "imply problems in the way the industry has been serving customers".
Savers do not yet recognise the "significant benefits" from the freedoms, which is a "missed opportunity for the pensions industry" which could still be addressed, she noted.
She said: "Pensions have tremendous advantages over other products but as long as the public remain unaware of their tremendous advantages, they will not make the most of their hard-earned pension savings."
"The pensions industry itself has not found ways of promoting pensions and designing more user friendly products or services that can help and enthuse customers," she added.
