More than four in 10 (43 per cent) of those in their 50s and early 60s don’t know how they plan to access their defined contribution (DC) pension, research from the Institute for Fiscal Studies has found, with a “large majority” withdrawing their DC pot in full first time.

The IFS highlighted the number of people not knowing how they will access their pension as “worrying”, warning that savers find it too difficult to engage with, and plan for, their financial security in retirement even as they approach retirement.

The research also found that those with low levels of wealth were more likely not to know how they plan to access their DC pension, as well as those in paid work and those who have not used a financial adviser.

In contrast, those who could answer more financial literacy questions correctly and those who were owner occupiers were found to be more likely to plan on buying an annuity rather than accessing their pension savings more flexibly.

Of those who did have plans for their pension pot, around one in seven (14 per cent) said they plan to purchase an annuity with their own provider, while only one in seventeen (6 per cent) said they will shop around for annuities.

In addition to this, 14 per cent of people were planning to enter into a flexible drawdown, while about one in five (21 per cent) plan to take chunks of cash as needed, and 8 per cent plan on leaving their pension untouched apart from the tax-free lump sum.

However, administrative data from the report revealed that a "large majority" of people accessing DC pension plans withdraw the pot in full, prompting concerns that some might be spending their retirement resources too quickly.

Despite this, the IFS argued that it is important to take into account wider financial resources, especially those that are already in annuitised forms, revealing that even fully drawn DC pension pots, which on average are worth around £22,600, typically make up a small fraction of overall resources.

Indeed, the report found that, at the median, the withdrawn funds account for only 3.1 per cent of private family wealth

In addition to this, the research found that, amongst those with at least some DC pension wealth, it is worth, on average, 12 per cent of wealth once including the value of housing, the state pension, and other pensions and savings.

This compared with large fractions of wealth on average being held in forms that will provide a stream of income or flow of benefits throughout retirement, including 24 per cent in the state pension, 19 per cent in defined benefit (DB) pensions, and 24 per cent in owner-occupied property.

Given the relatively low value of the DC pension compared with other resources available to savers, the IFS argued that, for many of those currently approaching retirement, the decisions around accessing DC pots are ‘low-stakes’.

Yet the report found that there is an "important minority" of people who make large withdrawals from their pension pots that constitute a large fraction of their total financial resources, whom good decisions around retirement planning will be "particularly important".

In particular, the IFS found that, for one in six of those who withdrew a DC pot in full, the amount withdrawn was worth at least £20,000 and this amounted to at least a tenth of their overall family wealth.

In light of the findings, the IFS acknowledged that identifying those for whom the decisions around DC pension decumulation are most important is a "key policy challenge".

The report therefore suggested that policymakers aim to target support at those who are at the biggest risk of making imprudent financial decisions which could materially affect their standard of living in retirement.

While the IFS said that the pensions dashboards could help savers understand and visualise their savings, it argued that people still need to think of their pension savings more broadly, in the context of their housing, other savings, and their partner’s/spouse’s pension wealth.

And whilst the IFS acknowledged that the decisiosn around accessing DC pots remain "low stakes" for many currently, it noted that future generations will rely more heavily on DC pots for financing their retirement.

Given this, it argued that now is the time to design policies to help individuals who rely on DC pots for financing their retirement, and ensure that future generations will be protected against adverse outcomes at older ages.

IFS research economist and author of the report, Heidi Karjalainen, stated: “It can be difficult for individuals to decide how to access savings in a defined contribution pension, and indeed many of those approaching retirement report that they do not know how they will access their pension pots.

“For many of those currently in their 50s, these are ‘low-stakes’ decisions, as they have significant other retirement resources available to them. But that will change as future generations will rely more heavily on defined contribution pension pots for financing their retirement.

“Developing how best to support people to make good financial decisions when accessing defined contribution schemes is crucial, so that individuals are protected against adverse outcomes through their retirement.”

People's Partnerhsip director of policy, Phil Brown, also highlighted the findings as "further evidence for why policy makers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for".

"The industry must end the assumption that every saver has the required knowledge to navigate complex decisions about their retirement savings," he stated.

Adding to this, Standard Life managing director for individual retirement, Claire Altman, stressed the need to help people think about how any savings fit with other income, such as the state pension.

"Questions such as whether a guaranteed income could be helpful particularly given the higher annuity rate environment, how best to achieve growth using drawdown, and how a blended approach might offer the best of both worlds all need to be given proper consideration," she continued.

“Inertia - through auto-enrolment in accumulation - has been a great success. But people shouldn’t be left to manage these choices and trade-offs when it comes to planning for their retirement.

"As an industry, we need to help get people into the right product or mix of products, at the right time, and to make it easier for people to make good decisions – especially more vulnerable customers.

"It’s important we get this right, whether that is through advice, guidance, guided default journeys, or a combination of these.”

Share Story: