Decumulation enjoys a low media profile compared with the accumulation stage of pension planning. Does this ‘moment of truth’ in providing retirement deserve a more prominent role?
The good news is that property and pension pots account for a huge proportion of UK wealth. But when it comes to the degree of human interest and engagement in each asset, it's no surprise which one triumphs, based on the sheer scale of media coverage. Check the schedules and you'll find that property-focused TV shows are still in heavy rotation. As far as we know, even Netflix hasn't developed a series about pension planning, although its hit ‘Ozark' series was one of the first-ever streaming shows to feature a financial consultant as the lead character. Maybe ‘Fantastic Retirements and Where to Find Them' will fire the imagination, but it's unlikely. And the property vs pensions debate doesn't stop there: one of the striking things about retirement planning is the huge focus on the ‘building work': the accumulation stage. Once the ‘house' is finished, following decades of creating and maintain a tax-efficient pension pot, the decumulation stage - the reward for all this meticulous planning - often enjoys a lower profile. Of course, it's no surprise that when clients reach that stage, they can feel overwhelmed by their different options at retirement.
Retirees fail to focus on retirement options
Since the introduction of pension freedoms in 2015, the retirement advice industry has worked hard to educate customers and the wider public about the options available, but no matter how hard we communicate, when the word ‘pension' enters the conversation, people tend to switch off. Compare and contrast that to the attention to detail - plus blood, sweat and tears - that is applied to buying a home. Our research tells us that just under a half of retirees (47%) tell us they don't know how to plan for retirement, whereas only one in four would be willing to pay for financial advice. It's unlikely you'd find those statistics being anywhere in the same ballpark for people undertaking property surveys to detect building defects.
In the current economic climate, people tend to think about short-term needs, and find it hard to plan. For pensions, this can leave them with income sustainability issues over the long-term. And bear in mind that 65% have told us that ‘having an income that lasts' is a top priority. Then there's the fact that retirement today is different from when most retirees started work. There's no ‘cliff edge' anymore, where employees collect a gold watch one day and then sleep late at home the next.
Three key questions, two retirement phases, one big issue
In the DC workplace pension market, three key questions apply to all retirees:
- How do they plan to fund and manage their money following retirement?
- How much do they have in their DC pot to help deliver what they need?
- What other sources are they expecting to rely on and are these in place?
Our research shows that there are two distinct phases of retirement; the ‘early years' when people may be more active and need flexibility, and later years when certainty and consistency become more important. Each stage has different income needs and requires different solutions. And that should ideally be where the industry's focus should be right now. Decumulation ideally be exciting and stimulating, the ‘big reveal', although not as thrilling as the previously mentioned ‘Ozark'.
So how do we create effective solutions that people find attractive? There are multiple drivers for change, each bringing something to the table. These include demographics, gender, product design, health, and investment issues. And as ever, there are more questions than answers.
Decumulation requires more focus and excitement
For demographics, what do boomers and Gen Xers expect at retirement? Are there different attitudes to risk? For product design, is it simply a case of flexi-drawdown followed by an annuity, or is there something more innovative, flexible, and dynamic to offer retirees? On gender, women currently have far smaller DC pension pots at retirement compared with men. To what extent are things changing for Millennial and Gen Z women, and how could this affect decumulation strategies? And what do health trends mean for retirees, when physical old age arrives later than ever before? And finally, investment. Following 2022's fixed interest asset shocks, is the traditional balanced portfolio of bonds and equities the best way to maximise income?
Major pension providers have the resources and vision to make decumulation more interesting, effective, and meaningful for DC customers. But we're certainly not there yet. Perhaps it really will take a game-changing Netflix show to move things along.
Find out more about Aviva Guided Pensions here
This post is funded by Aviva Guided Pensions