Reforms needed to make DC decumulation easier to navigate, govt told

Reforms are needed to make the pension system easier to navigate, the Institute for Fiscal Studies (IFS) has said, warning that the number of people making complex and consequential decisions about their pension wealth in retirement is rising "substantially".

The latest report from IFS, in partnership with the Abrdn Financial Fairness Trust, showed that private sector employees are increasingly accumulating retirement savings in defined contribution (DC) pensions.

Demonstrating this, the report showed that median DC pension wealth (for those with some DC wealth) at retirement is set to rise from around £75,000 for those born in the early 1960s to around £130,000 for those born in the late 1970s.

But the rise of DC has also left many savers facing complex and risky decisions, which the report warned could put them at increased risk of exhausting their private resources and falling back purely on the state pension and benefits.

Indeed, the IFS found that, unless people have significant defined benefit (DB) pension wealth, or they have bought an annuity, they face a risk of exhausting their private pension wealth because they have lived longer than expected, and therefore seeing large falls in their income.

According to the IFS' analysis, among 66- to 74-year-olds with private pensions, 40 per cent of retired singles, and 45 per cent of couples, would see their income more than halve if reduced to just relying on state support.

Given this, the IFS argued that reforms are needed to make the system easier to navigate successfully in order to help reduce this risk, suggesting that some of the policies in the upcoming Pension Schemes Bill could help address this issue, particularly if measures requiring pension providers to provide default retirement income solutions are included.

In particular, the IFS suggested that a hybrid solution, in which people are able draw down on their pension wealth flexibly earlier in retirement, but annuitise their pension at older ages, would work well for many savers.

However, the report acknowledged that this kind of default solution will not be right for everyone, noting that those with significant traditional DB pensions may have particularly good reasons not to want to buy an annuity with their DC pension pot.

It also admitted that it may not work well for those with health issues that significantly reduce their life expectancy.

The IFS therefore argued that defaults should be ‘soft’, with a menu of alternative options provided to make it easy for people to choose other sensible options.

In addition to this, the IFS said that boosting the take-up of advice, guidance or some combination should also be a policy priority, revealing that 73 per cent of those in their late 50s with DC wealth in 2021/23 did not recall using any sort of information about pensions and retirement choices in the last three years, and this includes substantial numbers of individuals with reasonably large accumulated pensions.

IFS research economist and report author, Bee Boileau, said: “The forthcoming Pension Schemes Bill is expected to introduce default retirement income solutions.

"Done well, these should improve outcomes for many, given the risks many face when drawing down pension savings through retirement at present. But key questions remain – in particular, there will be some for whom a retirement income default will not be right.

“The government and pension providers must ensure that it is straightforward to opt out of whatever new defaults are introduced, and that as far as possible those making these decisions are sufficiently informed and helped.”

Adding to this, Abrdn financial fairness trust CEO, Mubin Haq, emphasised that "the current system is clearly not working".

“With a decline in pensions and products that provide an income for life, individuals increasingly bear the risks and complexities of managing their pensions," he continued.

"Financial decisions in retirement will become even more difficult as we age. This is made even more challenging by the myriad number of pension pots many will have to manage. Yet few take up advice or guidance."

People’s Pension proposition director, Kirsty Ross, also agreed that, given the rise of DC savings, many people will need “much more support than is currently available”.

This was echoed by Standard Life managing director for individual retirement, Claire Altman, who said that those accessing their pensions are shouldering “significant” risks when it comes to making their savings last.

She stated: “As the government prepares to legislate for default retirement income solutions, the paper acknowledges that two of the key enablers are a reduction in the number of small pots and increased access to guidance and advice.

"Everyone’s retirement will look different so creating a system that enables people to seek support to maximise their income and one which gives them a comprehensive view of their total savings is critical.”



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