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The Actuary The magazine of the Institute & Faculty of Actuaries

The big question: can we help consumers avoid running out of money in retirement?


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Pensions are all about providing an income for life, right? Well, that works if you have  a defined benefit (DB) pension or a defined contribution (DC) pension and buy an annuity at retirement. However, when the UK introduced ‘freedom and choice’ to DC pensions in 2015, which removed the requirement to buy annuities, life became far more complex for the consumer, as Robert Dundas explains. Many people cannot afford or are unwilling to take financial advice to help them navigate the complexities, but fortunately they have free access to guidance from the publicly funded The Pensions Advisory Service and its associated Pension Wise service (soon to be merged into a single financial guidance body), and Michelle Cracknell explains how this can help. Finally, Paul Todd explains how guided retirement pathways can help ensure consumers get the best outcomes, given the reluctance to take guidance or advice and an unwillingness to make active decisions.

Robert Dundas

Chair, IFoA Turning Savings into Retirement Income working party

Robert Dundas

Consumers have a lot to grapple with

An alternative to buying an annuity is ‘drawdown’, where the consumer can be responsible for how the monies are invested and how much is withdrawn each year. These are complex matters, but an increasing proportion of people are entering drawdown without taking financial advice. Consumers must decide how much to withdraw so that they can maintain an income for the time required without restricting their spending and lowering their quality of life. 

The choice of investment strategy is also important – balancing the desire to maximise returns in order to make their pensions last longer, while managing the risk within personal tolerance levels. For example, our modelling suggests that a relatively high risk investment might provide the equivalent of around four more years of additional income versus a medium risk one, but of course with greater downside potential. 

The main conclusions of the working party’s report, Can we help consumers avoid running out of money in retirement?

(bit.ly/2G2QiWD), were:

1. An annual income of up to 3.5% of the initial drawdown fund is likely to be highly sustainable for consumers retiring at 65. In comparison, the same sum could secure an annuity providing a lifetime annual income of  between 4.5% and 5.5% of the purchase price.

2. Combining drawdown with annuitisation can balance the benefits of flexible access with a guaranteed income and has the potential to increase the level of income compared with pure drawdown. We found the mid-70s to be the most advantageous age at which to begin the transition from full drawdown to either partial or full annuitisation.

Michelle Cracknell

Chief executive, The Pensions Advisory Service

Michelle Cracknell

We need to act now to empower consumers

In order to help consumers avoid running out of money in retirement, we need to start doing things differently.

Currently, only a small proportion of people are retiring with DC pensions only. However, owing to the demise of defined benefit pensions, many people currently in their 50s or younger will be reliant on their DC pension pots for a significant part of their retirement income. Equipping them with the knowledge and skills to manage this responsibility is a major issue, so that they do not run out of money or live in poverty because they are fearful of spending their pension pot.

Unfortunately, seeking guidance on retirement matters is not the social norm; it was not needed when people received guaranteed income from the state and their employer. We need to make sure they know where they can seek help. To achieve this, and make pensions guidance a new social norm, we believe it is necessary to put in place interventions such as a ‘midlife review’, and having a guidance appointment arranged before someone accesses their pension pot.

Guidance does not mean making people into financial experts – it is about helping them formulate the right questions to ask of themselves or others, so that they feel confident in making informed 

decisions about their financial needs in retirement, including how much income they require from the DC pension pots, their tolerance to both investment and longevity risk and their legacy intentions. Guidance can also make people realise they need more bespoke financial advice to further refine their plans and perhaps to help implement them.

Paul Todd

Director, investment development and delivery, NEST

Paul Todd

Guided pathways can help consumers manage this complexity

Everyone wants control over the important decisions in their lives; that doesn’t mean they always exercise it. Before automatic enrolment, we all had control over whether we saved for pensions or not. Most didn’t, because the decisions over how, where, when and how much to save were complex and easy to put off. 

If we’re giving people control over what they do with their money in retirement, why not also give them the freedom not to have to worry about it? The choice should absolutely be theirs, but the simplest option on the table should still provide a good outcome. 

Before ‘freedom and choice’, the vast majority of people took the annuity offered to them by their provider. While there was choice in this market, no one exercised it, and insufficient consumer protection meant people were not getting the best deals. We risk replicating this situation today, with potentially far worse consequences in a world where most people are buying off-the-shelf drawdown products, often with their existing provider. They’re taking on risk in preferring the lure of flexibility to the security of annuities, which at least offer a guaranteed lifelong income.

We think guided retirement pathways that meet minimum standards, blend the best investment (drawdown) and insurance (annuity) solutions and are governed by trustees or similar fiduciaries in qualifying workplace pension schemes are a sensible answer, to ensure that anyone who doesn’t shop around doesn’t end up worse off. By taking away the worry, we can give people real freedom and real choice.

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