Next year marks the 10-year anniversary of the introduction of auto-enrolment. And there can be no doubt about its resounding success, having helped more than 10 million people to start saving for retirement.
For many savers, this success story will only truly benefit them if they make the right decision when it comes to taking their money. More than six years after the introduction of pension freedoms, significant concerns linger about how to ensure all savers make wise choices when they retire.
Given the success of auto-enrolment was based on inertia, it seems something of a stretch for the industry to assume all savers will suddenly understand the complexities of the different retirement options available and take control of their retirement planning when many with smaller pots won’t use a financial adviser. It’s a complicated business and, for many, not knowing how to approach things leaves them kicking the can down the retirement road.
It’s alarming to see many savers taking the path of least resistance and sleepwalking into retirement. As this behaviour has proven very difficult to change, what’s needed are simple, good quality products that meet AE savers’ needs, built to provide a sustainable income to last for their whole retirement. One that removes the need to be pensions literate and avoids them making ill-advised decisions and ultimately running out of savings once they’ve retired.
In our quest to make pensions work for everybody, and to collect key insights into members’ behaviours, our New Choices, Big Decisions Pension Personalities Revisited 1 research showcases the challenges faced by those approaching retirement as well as the decisions they typically make.
It’s an eye-opening read. We’ve followed a group of people since freedoms threw the shackles off how they can take their pension money and found that the group subdivided into seven different types with each subgroup having distinct characteristics. We’ve illustrated each of these subgroups by summing up their common characteristics and given them personas.
Let’s consider a couple of these personas which concern us the most as they potentially face a high chance of a poor retirement outcome. Enter ‘Leave it Larry and Linda’ – a group so overwhelmed and daunted by the complexity of pensions information that, over recent years, they’d decided to leave their pension savings untouched. And once the decision to do nothing had been made, it was ‘out of sight, out of mind’ unless a life event – typically illness or redundancy – had fundamentally changed their plans. Lacking straightforward information on how to maximise their income, the Larry and Lindas had made the active decision not to make any decisions about their pensions for the time being.
Then we have the ‘Spend it Simon and Sally’ group, who initially were as pleased as punch to ‘live a little’ and get instant gratification from taking their 25 per cent tax-free cash to spend on holidays, home improvements, or new cars but haven’t grappled with planning how to manage their pension pot. Instead, they’ve just rolled it over with their pension provider into a drawdown product and treated it like a bank account from which they withdraw lump sums when required. This group have behavioural biases that stop them from contemplating their later years. They struggle with numbers and are unaware of investment risks and their own likely longevity. Our own rough estimates suggest that around three in four of this group will likely exhaust their DC money before they die.
Making decisions is difficult for savers as, in reality, they can’t help but throw their life’s fears, hopes and dreams into the equation. For them, the here and now is easy to understand, whilst 20 plus years into the future is hard to imagine.
This situation is far from ideal. With enormous uncertainty created by Covid-19, there’s an additional pressure which could lead people to make short-term decisions that could jeopardise their long-term financial wellbeing by accessing savings, losing out on potential returns, paying extra tax, ceasing pension payments and even being scammed.
The industry needs to up the ante to help savers access straightforward guidance so that they can realise that retirement is a beginning, not an end. The crisis has given all savers a unique chance to step back and reflect on their needs for the years ahead – so it’s crucial that we all have the information we need to make good decisions.
Our personas research is giving us much food for thought about how we can support the 5.3 million members of The People’s Pension. We’re asking the questions: ‘Are we doing enough?’ and ‘What can we do differently?’
The concept of retirement is changing before our eyes – we must help savers, many years before they’re planning to retire, realise it’s not a future that’s going to fund itself. As savers, many of us need a simple to follow plan, so that we all understand what we can do differently to control the outcome.
For further information and to read our full report go to www.thepeoplespension.co.uk/ personalities-CA or call us on 0333 230
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