For the pension saver the choice of options must be bewildering, everything from auto-enrolment and stakeholder pensions through to SIPPs, SSAS, Personal Pensions and the rest. That’s not to mention the income options post retirement. It’s no wonder Financial Planners are sought after.
And of course, George Osborne made it even more complicated in 2015, adding even more choices under the Pension Freedoms revolution.
With this in mind, it’s no surprise that many are failing to understand their rights and options when it comes to income drawdown, an increasingly popular choice.
A new study by Zurich of 2,000 pension savers found that more than half of over-55s do not know they can reduce income withdrawals in retirement (and thereby preserve some of their precious capital).
With other studies warning that millions of pension savers around the world, including the UK, will run out of retirement income after 10 years post-work this suggests things are not right at all.
I would guess that many of the people ignorant of their ability to vary income are DIY or passive consumers, taking little interest in their personal finances. They are the people who most need advice but convince themselves it is too expensive or “not worth it.”
The big issue here is that with the Pension Freedoms, and even prior to their introduction, it has become clear that pension savers can no longer afford to be passive pension savers watching the income arrive in their bank account each month. They need to be actively engaged in the retirement income process, before retirement and during retirement. Some may be reluctant or unwilling to do this and the risk magnifies as a result.
Inertia still rules when it comes to pensions. We have grown up to believe that when we retire we will have worry-free, comfortable company pension or annuity that will simply provide a steady income for life, index-linked of course.
It is easy to see why pension savers want simplicity. After all who wants to spend hours or days a year thinking about what retirement income to draw down the following year or what investment choices to make. Working with a Financial Planner makes this easier but it comes at a cost some can ill-afford.
The answer lies in accepting there is a real and growing problem here and if we are not careful the Pension Freedoms will turn out to be the biggest retirement dud in history, exposing millions to risks they neither wanted nor expected. People will simply drain their retirement income way too fast and be left with little for the years when they may need it most.
The FCA and trade bodies have a role here in coming together to assess the problem and then doing something about it. As Zurich says it in its report, the risks of not managing retirement income withdrawal are significantly reduced when a Financial Planner is consulted.
Making it easier and cheaper to consult an adviser, or better still having an expert review the income withdrawal plan regularly will be critical to future success and risk mitigation.
Just as we’ve moved to an auto-enrolment world in occupational pensions, perhaps the time has come for auto-advice to be added to all pensions. It could help prevent some pensions disasters.
Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with over 30 years of experience. This column appears most weeks.