Pensions ticking timebomb: study reveals savers sleepwalking into retirement six years on from Pensions Freedoms
Nearly six years on from the introduction of Pension Freedoms1, new research has shown that older savers are sleepwalking into retirement and risk running out of all their Defined Contribution pension savings with a third of their retirement still ahead, meaning they could spend their final years reliant on the state pension.
Leading workplace pension provider The People’s Pension2 and asset manager State Street Global Advisors3 have today published the latest findings of the New Choices, Big Decisions4 study, which examines both retirement planning and spending habits following the introduction of Pension Freedoms in 2015. The in-depth research by the consultancy Ignition House, reveals that people facing retirement want their pension provider to give them a safe guided path into retirement, rather than the complex array of decisions with which they are now faced.
The new research centres around interviews with 50 savers, including 30 people who took part in the first study in 2015, who are either approaching retirement or have already finished their careers. The study shows that, because pensions freedoms have compelled people to put together their own retirement solutions, 74 per cent5 of those interviewed are spending their pension savings at a speed, which at best, means they will run out of money in their mid to early 80s, even though many will live into their 90s.6
The research reveals how policy makers and the industry have built a system that could only work effectively based on unrealistic assumptions as to how people behave. The work by Ignition House maps out the massive discrepancy between expert assumptions and actual behaviour.7
Key findings include:
- Savers are scared of planning for the future as they don’t want to discover the ‘truth’
- They underestimate the financial risk of growing old and don’t understand how inflation can impact their savings
- The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up
Phil Brown, Director of Policy and External Affairs at B&CE, the provider of the People’s Pension said:
“This research shows why policy makers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for, and which will ensure that DC pension savers have an income throughout their retirement. 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?
“This report fills a big gap in our understanding of how pension freedoms are working in practice.”
Alistair Byrne, of State Street Global Advisors said: “This research shows clearly the very many challenges that older savers face when making a decision about their pensions. 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.”
- Pension Freedom and Choice were introduced in 2015, click link here
- The People’s Pension is a leading workplace pension scheme from the not-for-profit B&CE Group, with more than five million pension savers from over 90,000 employers and £12 billion assets under management.
- About State Street Global Advisors For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third-largest asset manager US $3.15 trillion* under our care.
*This figure is presented as of September 30, 2020 and includes approximately $80.51 billion USD of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
4. The full New Choices Big Decisions report is available here
5. This makes the findings of our sample similar to that which would apply to a much larger sample conducted by the FCA in 2020. This found that 71 per cent were withdrawing income at higher than a four per cent annual rate. This implies that they would likely exhaust their DC pension savings early. The true figure in our sample may be even higher than 74 per cent as 20 per cent of the sample either did not know their rate of drawdown or where they had not yet retired, did not know what rate they would select. FCA data is here: https://www.fca.org.uk/data/retirement-income-market-data
6. The source of this figure is Richard Willets, projection based on mortality rates for the population of England & Wales derived using CMI_2018 https://www.justgroupplc.co.uk/~/media/Files/J/JRMS-IR/documents/summit-docs/richard-willets-making-sense-of-the-slowdown.pdf
7. A diagram attached shows assumed actual behaviour attached.
For further information, contact Blaise Tapp, the media relations manager at The People’s Pension, on 01293 205336.