What kind of retirement do you expect to enjoy? It sounds a simple question, but the answer is far more complex.

In the past, the majority of retirees would have consciously (or passively) opted for a pension income for life. With the freedom and choice reforms, we now see a significant number of retirees withdraw money from their DC pension pot, or transfer their DB to DC scheme to take advantage of the flexibility.

In its recent consultation, the Financial Conduct Authority highlighted that many consumers had welcomed the pension freedoms, but there are other considerations too. Whilst many retirees will be delighted to have greater access to their pension assets, they should not lose sight of the original purpose of a pension – to provide an income through retirement.

The downside of this increased flexibility is increased risk to the retiree – and specifically the longevity risk. We may see retirees withdrawing too much from their pensions as they have not carefully considered their long-term income needs. This risks a potentially dangerous who-blinks-first game with their pension savings: will they die before their money runs out or will their money run out before they die?

It is a real possibility for many, as research from Capita Employee Solutions found that people massively underestimated their own life expectancy by around 15 years. This illustrates the extent to which people risk underestimating the years they will need to support themselves in retirement. It is this specific risk that pooled pension products help to hedge against, although the price to pay is reduced flexibility.

The scale of the challenge to the pensions industry, of ensuring that members do make good decisions around their retirement and are adequately informed, should not be underestimated. High-quality communications, early engagement, support and guidance can address these concerns and should be the focus of any exercise. This will mean that retirees will be better placed to answer the first question, on the kind of retirement they can expect.

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