Nearly half unclear how to access DC pension – IFS
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The Institute for Fiscal Studies found that 43% of people in their 50s and 60s with defined contribution pension pots have no clear plan for how to access this. It also showed 16% of people took out an entire DC pot worth more than £20,000 when this represented more than a tenth of their overall wealth.
The research shows people’s attitudes and reaction to the array of choice for how to take a DC income at retirement, with 43% saying they did not know how they will access their DC pension.
A fifth (21%) of people said they plan to take their pot as chunks of cash, while 14% intended to go into drawdown. The same proportion were planning to buy an annuity from their own provider. Worryingly, just 6% said they will buy an annuity from a different provider. Nearly one in 10 (8%) said they will leave the pension untouched save for the lump sum.
Other findings of the research looking at people aged 50-64 with DC pension wealth include that those with higher levels of financial literacy are more likely to want to buy an annuity, and that those who have used a financial adviser are more likely to plan to go into flexi-access drawdown.
Close the stable doors before the horse has bolted
The report published on Friday, funded by the Retirement Savings Consortium and the Economic and Social Research Council, also throws light on how worried industry and government should be about full withdrawals.
Heidi Karjalainen, research economist at the IFS, looked at people who withdrew their DC pot in full considering not just the absolute amount but also what proportion of their overall wealth the withdrawn pot represented.
“We would worry more about people potentially making suboptimal decision for those who take a large DC pot in full and [where] it also represents a large proportion of their overall wealth,” she said speaking at a webinar organised by the IFS on Friday.
Taking as ‘concern’ thresholds £20,000 and 10% of wealth, she showed that for 16% of people who took out an entire pot worth more than £20,000, this also represented more than 10% of their overall wealth.
“It’s still a minority but not a small one – it's not a trivial number of people,” she observed, adding: “The risk of people ending up in this group will grow as more people rely on DC.”
She concluded that people taking out large lump sums from DC were not automatically a concern as most of these households have other wealth, but said this group is likely to grow – making it important for policymakers to think about them now.
“How can policymakers and industry identify those in the most worrying ‘at risk’ group to target help and advice? In future this will become a more important question, this is why it’s important to get it right now,” she said.
The risk is that policymakers will ignore the issue as decisions about accessing DC are ‘low stakes’ for many of those currently approaching retirement, because of the relatively low value of the DC pension compared with their other resources.
Among those with at least some DC pension wealth, it is worth an average 12% of total wealth, which includes housing, state pension, other pensions and financial assets. On average, the retirement income of people in their 50s and early 60s will be made up of 24% state pension, 19% DB pensions and 24% owner-occupied property.
The Pensions and Lifetime Savings Association’s director of policy and advocacy, Nigel Peaple, said there were no immediate problems with decumulation because so many people have a DB entitlement.
However, he added: “The policy implication is we need to act now, close the stable door before the horse has bolted.”
He called for simplification of the retirement options so guidance can be more effective, saying advice would not be affordable for everyone, and reiterated the association’s call for reaching 12% minimum auto-enrolment contributions, split evenly between employers and employees, by 2030.
DC used for gifting as DB still important source of income
The report confirmed that people in their 50s and early 60s still rely on defined benefit income to a considerable extent. Only about a third of them will depend purely on DC, but this proportion is set to grow as private sector employers have now largely closed their DB schemes.
The high reliance on non-DC income might also go some way to explain why DC is frequently used as a wealth transfer vehicle. People in their 50s who took out DC in full were almost twice as likely to have given a gift or loan to family or friends than those who had not taken a full pot. Karjalainen said most gifts are given to children.
What should industry and policymakers do to avoid people jeopardising their retirement income?
