Which retirement options are available to defined contribution members strongly influences how they access their pension and can impact their outcomes, a new survey has found. Are pension funds inadvertently pushing their membership into high-cost SIPPs? 

 

A survey of 18,500 DC members over age 55 by pensions consultancy XPS showed that where schemes offered the full range of options, more members took drawdown than cash. Where all options are available, only 6% of members bought an annuity; where schemes did only offer partial flexibilities, 10% chose an annuity. 

 

These actions could mean members paying extra tax if they choose a single lump sum or losing their entitlement to means-tested benefits. 

 

“There has never been a more important time for savers to focus on their financial wellbeing. The economic slump caused by the Covid-19 pandemic accentuates the need to save them from making potentially disastrous decisions about their future,” said Sophia Singleton, head of DC at XPS.  

 

 

Only 11% of schemes offer flexi-access drawdown, according to XPS, which said the fact that available options mould outcomes is too often overlooked. A lack of choice can force members into decisions which either leave them with less income at retirement or unintentionally incentivise them to transfer to more expensive arrangements. 

 

Three-quarters (76%) of all transfers that took place in the year to 31 March 2021 were made to self-invested personal pensions, with an average transfer value of £102,000. The rest were transferred into personal pension and occupational schemes, showing members are consolidating their pots before retirement. But as the majority end up in a type of vehicle which can be expensive, with members paying ongoing administration fees of up to 1.6% a year, this may leave them running out of money much earlier than would be the case in a low-cost fund like a master trust. 

 

Singleton said that “there are clear, and relatively easy, actions that trustees and sponsoring employers can take to support DC savers’ retirement outcomes". 

 

 

A survey by Willis Towers Watson from July this year found that 59% of employers want to enhance at-retirement support but that currently 70% use a provider’s off the shelf provision, with under a third resorting to a third-party specialist. 

 

Offering in-scheme drawdown is difficult for trust-based schemes, however; unsurprisingly,  only 13% of them did so. About 43% offered access to a third-party drawdown provider, but 83% had an annuity broking service, which could be another factor influencing outcomes. Among master trusts, 65% had their own drawdown, and 59% of contract-based schemes did. 

 

 

 

For schemes it can be difficult to decide what to offer members in practice when industry and government are unsure of what the best decumulation options are and whether the three available now are enough to enable good outcomes. 

 

Last month, a panel of experts and policymakers variously suggested that more guidance, blended products or collective defined contribution could all be part of potential ways to improve outcomes, but also highlighted the drawbacks of each. 

 

The Pensions and Lifetime Savings Association has been calling for the introduction of ‘guided retirement income choices’, a system of support and guidance at retirement that includes signposting as well as product innovation, by blending the existing options of annuities, drawdown and cash. The PLSA said members, who often feel overwhelmed by the complex choices before them, currently take the path of least resistance when making retirement choices, which the XPS survey seems to confirm.  

Policymakers warned that blended products could make retirement decisions even harder for members by introducing additional complexity, but pensions minister Guy Opperman recently told the Work and Pensions Committee that he plans to launch a call for evidence about retirement choices available to  members in trust-based occupational schemes.

What retirement options and support should be on offer to enable good outcomes?