Retirement Outcomes & the future

There’s been a great deal of change in the world of pensions and retirement in recent years - think automatic enrolment and pension freedoms (whereby anyone over 55 can take as much from their Defined Contribution or DC pension pot as they wish). But what has the impact of all this change been and where might it lead us in the future? The Financial Conduct Authority (FCA) is the body in charge of regulation in the pensions market, and they carried out a study to examine how behaviours and attitudes are changing. An interim report was published in July 2017 and makes for pretty interesting reading. We’ve picked out a few key statistics below:

Status quo

While some striking developments have emerged, some familiar behaviour is also apparent. Perhaps the biggest of these unchanged behaviours is the tendency for us to take the ‘path of least resistance’. The report identifies that we’re still not ‘shopping around’ for our retirement solutions. Where in the past this has meant people simply accepting the annuity offered by their existing pension provider, it’s now the incumbent drawdown solution that’s being entered without comparing offerings from elsewhere. The report also found that there was widespread mistrust of pensions in general, pointing at negative press coverage, a feeling that pension funds were ‘doing nothing sitting there’ and that regulation around pensions was constantly changing to the detriment of consumers. Nothing new there then!

All change

Having said that many aspects have remained the same, there have been some very dramatic new trends. Most notable among these is that accessing pension pots early (before age 65) has become the norm. What’s more, where annuities were once the favoured retirement income vehicle (accounting for 90% of pension pots), drawdown plans now attract twice as many pots than annuities.

Too cautious?

Most consumers (94%) who fully withdrew their pot had other sources of income in addition to the State Pension. With Defined Benefit (DB) schemes the most likely source of alternative retirement income at 21%. This is good news, showing that people are taking a reasonably cautious approach on the whole, not leaving themselves reliant solely on State benefits in retirement. However, of those who had fully withdrawn their pots, more than half had transferred the funds into alternative savings or investments. While some might see this as a positive, citing that the funds hadn’t been spent on holidays, home improvements or new cars for example, there is the possibility that these consumers are inadvertently missing out on the tax advantages that pensions bring, both when contributions are paid in and when income is withdrawn.

What does the future hold?

The FCA estimates that by 2020 workplace DC schemes will hold £1.7trillion, five times the £340billion held in 2015. Annuity providers are leaving the market as demand for the product falls, and so far there’s been very little in the way of product innovation. And while 50 providers sell retirement income products, half of all sales since pension freedoms have been dominated by just seven providers. The FCA has confirmed that it will be looking closely at how the market develops in order to make sure that consumers are protected. A final report on the retirement income market is due to be published in the first half of 2018, but until then, our best advice to consumers is to do your research, take advantage of free guidance services like PensionWise and consider paying for professional personal advice. Making mistakes in retirement income decisions can be very costly.

Source: FCA: Retirement Outcomes Review - Interim Report, 12 July 2017, available on FCA website.

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