UK pensioners need more help with difficult drawdown decisions
Like every year, hundreds of thousands of new retirees have big decisions to make about their future income – guest post by Kevin Hollister
More than 100,000 new retirees entered drawdown unadvised. Meaning they risk making difficult choices, which may negatively impact their retirement outcome if they are not helped further.
The latest Financial Conduct Authority (FCA) statistics for the year between 1 April 2021 and 31 March 2022 showed that 700,000 defined contribution (DC) pension pots were accessed for the first time. These pots contain total assets of around £46 billion.
Approximately 120,000 pots were used for drawdown after taking advice, with 110,000 pots, containing an estimated £6 billion of assets, going into drawdown without advice.
That is a lot of retirees and money and a major challenge for the pensions industry. What can be done to help unadvised retirees make the most of their DC pension pots?
Pensions at retirement
It is important to note that many people have more than one pot. Others have non pension investments they can put towards a retirement income. Most people will have a state pension and many current or soon-to-be retirees will have some defined benefit (DB) scheme income from older legacy DB schemes. Looking at the choices at retirement for the DC pots.
Around 400,000 DC pots were taken in one lump sum. Most of these pots will be relatively small. It never seems a wise move to empty out pots unless there is a clear reason for doing so, such as making a large purchase, or paying off high-interest debt. It is certainly not a good idea to simply take out a lump sum and place it into a bank account as you may lose quite a bit in tax and earn little interest.
In the same FCA figures it can be seen that about one in ten (70,000) will be used to buy an annuity which provides a guaranteed income for life. This is a great choice because it provides a fixed sum, paid out predictably, for as long as you live with no risk.
All pots that are not taken as one lump sum or used to buy a guaranteed income will be used for drawdown of one form or another. This will involve taking income flexibly each year.
These pots are typically used to set up a long-term drawdown arrangement, or to take payments as and when they are needed. For unadvised retirees, managing drawdown can be very difficult. They must decide whether to keep their pots with their current provider (or providers) or move to a new one. Many may have no choice in this matter because their current provider, or DC scheme, does not allow drawdown.
What do those using drawdown unadvised want to do with their pots at retirement?
Our user base matches the FCA data well. We polled them and found that 73% would choose to put all their pots in one place. When asked where they would move the funds, 63% said they would search the market for the best provider.
If we extrapolate this finding to the FCA stats, it would mean that £3 billion of assets, 50% of the £6 billion, will be looking for a new home each year. Ideally, this home will be what can be considered by them as the best drawdown product.
What would this product need to look like for the unadvised?
Retirees need a product which comes with the tools required to help them build a tax-efficient withdrawal plan. This plan must be expected to last for the rest of their lives. Ideally, it should be paid as a base default income.
These tools should also enable savers to test their plans to see what happens if things don’t go as expected and track it easily over time to make sure it remains feasible. Any product should also offer the flexibility to change this long term plan if circumstances change and allow ad hoc payments when needed.
The provider should also offer an “off the shelf” default investment fund in the product specifically designed to meet these expected drawdown payments and the ability to add some guaranteed income to get the best of both worlds.
These are clear needs, yet despite this, we have not yet seen providers give retirees much of this help, with perhaps the exception of a few large DC trusts such as Creative, Smart and Nest.
To plug this gap, we have developed Guiide.auto, which we now offer in our first joint solution with Penfold, the pensions provider. This product already provides most of the features retirees should be looking for above. We will also be continuing to develop this further over time, by listening to what those who use it say they need.
We hope this will ensure the non-advised are not left to figure it all out on their own at retirement and can get the most from the Pension Freedoms.
Kevin Hollister, is a pensions actuary, Founder of Guiide and Guiide DB