Philip Smith is director of DC at TPT Retirement Solutions
Pensions Minister Torsten Bell delivered a spate of powerful messages for pension savers at this year’s PLSA Investment Conference, notably stressing that the damage done by poor returns was the big challenge facing defined contribution (DC) pensions.
Yet, there was an even more impactful and unspoken message: The industry has fixed how people save, but not how people access or spend those savings.
Poor returns in retirement, he warned, are just as damaging as the broken promises of the DB era. The challenge is clear: decumulation can no longer be an afterthought if we want better outcomes.
I wholly agree with the pension minister's sentiment. While much of the industry's focus has rightly been on growing pension pots, the minister's remark serves as a much-needed wake-up call that what happens after retirement can make or break a saver's financial future.
The minister made it clear that improving how people draw down their pensions is now a top priority. He described poor returns in decumulation as a serious risk that may be less dramatic than past pension scandals, but can be just as damaging to individual savers.
It has been confirmed that the upcoming Pension Schemes Bill, due before the summer recess, will include plans for cutting costs and putting decumulation on a firmer footing. This is intended to pave the way for better retirement outcomes across the board.
However, as it stands, complexity is undermining retirement choices facing savers and making decumulation a more arduous process than it should be. Why is that the case?
Complexity undermining retirement choices
There are three key reasons why employees struggle with retirement choices. First, savers are unsure how to draw upon their pension wealth. The introduction of pension freedom rules has boosted the various options for savers. However, research by TPT shows that complexity still weighs on savers' retirement choices. Almost one in two (49%) are worried about how they can access their retirement savings.
Second, financial advice can make a huge difference in helping people navigate their pensions, but it still feels like a luxury for many. Deciding how to access retirement savings is one of the biggest financial choices people make and with pensions set to fall within the scope of inheritance tax from 2027, the stakes are only getting higher. Yet cost remains a major barrier, especially for lower earners with smaller pots.
The UK government launched Pension Wise in 2015 to offer free, impartial guidance. While this was meant to close the pensions advice gap, uptake has been lacklustre, with TPT's data showing that 6% of retirees are using this. Similarly, our data shows that 8% of those nearing retirement turn to paid financial advice.
Third, savers are subject to high uncertainty and risk. Employees face many lingering unknowns, such as how long they will live and what future inflation levels will be, among others. These uncertainties make it even more difficult for savers to plan the shape of their retirement journey.
The need for more innovation in decumulation
That's why it is imperative that pension savers need more innovative decumulation offerings to improve their retirement. Pension savers need simple decumulation solutions that provide an income for life, linked to inflation.
TPT has built a solution to offer a clearer and more flexible path to drawing a sustainable income in retirement, which will be launched in the coming months. It's designed to simplify complex decisions, with tools to help members plan and adjust their income over time, including the option to convert to an annuity later in life. However, this won't move the needle unless wider industry action takes place for more robust decumulation options to become the norm.
For decumulation to truly work, the industry must move beyond fee cost-cutting and focus on value. Delivering higher overall returns will be essential to making pension pots go further in retirement.
The real test of pension freedoms isn't just whether people can choose how to access their savings, it's whether they're supported to make the right choice, and reforming decumulation options is key to achieving this.
Philip Smith is director of DC at TPT Retirement Solutions
