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04

How squirrels, mice, ostriches and pilot fish all came to live under pension freedoms

Open-access content Friday 1st April 2016 — updated 5.50pm, Wednesday 29th April 2020

Before the introduction of pensions freedoms came widespread speculation that consumers would cash in their pensions and blow the lot.

Before the introduction of pensions freedoms came widespread speculation that consumers would cash in their pensions and blow the lot. The prospect of large swathes of the population leaving themselves nothing to live on in old age rang alarm bells in the media. Tales abounded of flashy Italian cars bought with pension fund cash.

There were fears and concerns within the industry too. Adopting a measured approach, actuarial and management consultancy Milliman looked overseas for countries where no compulsory annuitisation existed to gain insight of the effects on markets (particularly the annuity market) and consumer behaviour. The prevailing school of thought was that most retirees would elect not to take an annuity.

UK market research by Bdifferent revealed that, while 38% of those questioned wanted to take the cash, 70% wanted to stay with the same pension company. Crucially, one aspect of what the majority needed from their pension remained unchanged… an income for life. 

In the new world of pension freedoms, there were risks to be managed at retirement, the individual being ultimately responsible for potentially life-changing decisions. There were concerns that the least wealthy and financially competent would struggle to choose the most suitable route. Without the benefit of advice steering them in the right direction, the fear was that people would run out of money during their retirement. 

How hard did reality bite? The first two months saw over £1bn in cash taken from pensions (source: Association of British Insurers). And from April until June 2015, 82% of the uncrystallised funds pension lump sum (UFPLS) full encashments were for pots under £30,000 (source: Financial Conduct Authority). The fear became reality that many consumers, particularly those with smaller pots, would take the cash. Sales of annuities dropped drastically, and there was significant growth in drawdown sales.

Different market research among the over-55s found that most individuals were aware of their options, relishing the freedom to choose and be in control of their own finances. However, most admitted to having done little in the way of financial planning for retirement.

Worryingly, many were not even aware of the value of their pension pots. Neither had they considered what percentage of their working income they would need to survive or be comfortable in retirement. The decisions they face at retirement are daunting; few feel confident making their own investment decisions. Higher-net-worth individuals will use the services of a financial adviser, but most appear to rely solely on information from their pension provider. So, the advice gap is not only alive but is vigorously kicking. 

Each individual is different, but consumer segmentation has identified some categories that have merit in terms of behaviour and attitudes towards retirement planning. 

The 'pilot fish' has a long-term financial adviser and is happy and confident in following their recommendations. 'Squirrels' are truly independent information-gatherers, who are confident to make decisions and deal direct. The 'mouse' is organised and realistic about the need to sort income but overwhelmed by choices and timorous about decision-making. Finally, 'ostriches' (half of the population) know they need to take action, but depression about income makes them bury their heads in the sand.

Teresa Roux is founding partner of Bdifferent, which specialises in financial services research, and Colette Dunn is head of strategy at Milliman. They both spoke at the IFoA's 'Life in Retirement - Consumer Needs in the New Post Retirement Market: Implications for Actuaries' event

To view all upcoming events, visit bit.ly/1QGUnke

This article appeared in our April 2016 issue of The Actuary.
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