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Nearly 10m British pension savers risk running out of money in retirement because they do not know how to make their savings last, according to new analysis which sheds fresh light on the complex choices facing retirees.
In 2015, big changes to tax rules handed millions aged 55 and over full control over how they access their retirement cash, including spending the fund in one go.
But a new study has found that faced with this increased choice, large numbers of investors are struggling to make good decisions about how and when to take pension cash.
A poll of 4,000 UK adults — published this week — found that just under a third planned to manage their own finances in retirement, known as the DIY approach. Applied to the whole population, that would be some 8m people out of an estimated 29m pension holders.
But 35 per cent of those surveyed went on to admit that they knew nothing about product options at retirement and the pros and cons of each. That would amount to 10m people in the UK.
Just over a third, 34 per cent, of those who took part in the survey, commissioned by LV=, a pension provider, said they did not know how to ensure their money lasted through their retirement.
“I am not at all surprised that a considerable number of savers do not know how to ensure that their retirement savings will last,” said Christine Ross, client director and head of private office — north with Handelsbanken Wealth & Asset Management.
“The answer used to be an annuity that offered a guaranteed lifetime income. Most people do not want to trade the flexibility of drawdown for the lower potential return and the irrevocable decision that is annuity purchase.”
Since the pension freedom reforms in 2015, savers with defined contribution-style pension plans have expanded options on how to access their savings, including putting their fund into flexi access drawdown, where the fund is typically left invested in the stock market. In drawdown, cash can be accessed as and when they wish, but tax is payable on withdrawals after the first 25 per cent tax-free amount.
They could also opt to take tax-free cash and leave the remainder of the fund invested. They could also use the fund to buy an annuity, which delivers a secure retirement income stream for life.
In spite of the more complex product choices at retirement, which put savers at risk of running out of money in retirement, 31 per cent of UK adults who took part in the survey said they were not planning to get advice from a professional financial adviser on their options.
The reasons for avoiding professional advisers included a reluctance to pay for this service, a belief that they could make the decisions themselves and a view that advisers don’t offer good value for money.
In spite of this, the survey found that 35 per cent of people — equivalent to 10m pension holders in the population as a whole — knew nothing about how stock market falls can affect retirement savings.
“A DIY approach to managing large pension funds at retirement is fraught with risk,” said Clive Bolton, managing director of Savings and Retirement at LV=.
“People can easily buy the wrong products, incur unnecessary tax bills or simply exhaust their retirement funds too quickly but an adviser will provide an impartial, cool-headed approach to their client’s finances and offer solutions that the client will not even have considered.”
From the age of 50, savers with defined contribution pension pots can access free and impartial guidance on their options from Pension Wise, a government-backed service. However, savers wanting personalised plans are encouraged to seek independent financial advice.
“Pre-retirement planning is probably one of the most important times to seek professional advice,” added Ross.
“Ideally, ongoing advice would be sought by those drawing flexibly from their pensions and other savings to ensure that drawings are within a safe level and that there is a degree of surplus to see the saver through those more challenging investment periods.