In between joint reports into retirement, with The Pensions Regulator (TPR) consulting on its approach to enforcement and its long-awaited guidance on pension transfers, the Financial Conduct Authority (FCA) published a data bulletin on pensions and retirement income.
Based on consumer responses to their Financial Lives survey and actual market data, the bulletin demonstrates two major issues:
- Consumers do not understand that in a defined contribution (DC) pension regime they will have to manage their plan themselves. This means engaging with their pensions, making important financial decisions and regularly checking progress towards their retirement goals.
- Many consumers have no idea how their pensions work, and those that do are often wrong. Even allowing for the fact that the survey results are based on the number of individual people making decisions, and the market data is based on individual products, there are some marked difference between what people think they are doing, and what is actually happening.
These two facts together mean that something has to be done, or the post-baby boom generations will face a very poor retirement.
The findings
81% have not thought about how much they should be saving for retirement and 75% have not thought how they will manage without a salary. This is the point of pensions – to provide an income when earnings cease. So while automatic enrolment (AE) is currently doing a great job of getting younger people to save, it is essential that the focus moves away from minimum contributions rates towards income replacement.
32% of people with DC pensions said they did not know the size of their pension pot. This is not surprising since the survey also found that only 52% of people with DC pensions received an annual statement and actually read it, probably because most of them are still unreadable. The good news is that this percentage increases with pot size and with age, both of which hopefully occur together although it would be even better if they were to think about projected income rather than pot size.
47% of the people who accessed their defined contribution pension over two years ago say it is not enough to live on. This may have been a surprise since nearly half of those surveyed said they will not start to think about their pension until they are within two years of retirement. This is too late. It is too late to be thinking how much income they can have, too late to realise there isn’t enough to support their lifestyle and far too late to increase contributions for long enough to make a difference.
55% of all pension pots accessed since pensions freedoms were taken as full withdrawals. The majority were from small pension pots which were unlikely to provide a reasonable income stream anyway, but it is clear that more must be done to improve the average pot size so that this is not the consumer’s only option. It is also disturbing that only 17% of individuals actually thought they had withdrawn the full pot. This can be partially explained by multiple pension pots but it still suggests considerable confusion on the part of consumers regarding which retirement option they have selected.
68% of those entering drawdown took regulated financial advice, but only 32% of those withdrawing the full pot and 34% of those buying an annuity did so. This is partly because those choosing drawdown tend to have the biggest pots, and are more likely to be able to afford advice, however, it is also possible that it is because maintaining drawdown income is an ongoing requirement rather than a one-off transaction. Advice would certainly seem to be beneficial in an environment where 25% of people who have accessed a DC pension said that they have already withdrawn income or a lump sum from their pension but don’t know how it works.
All this shows that the FCA is right to be monitoring the progress of pension freedoms, and it is right to be concerned that some people might spend their pensions pots instead of using them to provide an actual pension.
What we really need to be worried about is that people still don’t know that the onus is on them to save, and to save adequately for their retirement. I know you know this, but the fact is that people outside of financial services do not and it is essential that all interested parties, including government, do everything they can to ensure the percentages quoted above start to change.
Fiona Tait is technical director at Intelligent Pensions
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