With April now galloping over the horizon, only one in five of the 55-70 age group say that they understand the term ‘marginal tax rate’. Only half of DC pot holders say they understand what an annuity is. And one in ten believes that the best way to minimise their tax liabilities after April will be to withdraw everything from their pension pots in a single lump sum.
These are just three of the frankly shocking findings to emerge from a survey conducted by the International Longevity Centre think tank and published on 14th January. The new research paper, “Making the System Fit for Purpose” finds that consumers approaching retirement are ill-equipped for new pension freedoms. And that contingency plans are needed to prevent consumer harm arising from the new pension freedoms
The research, supported by a consortium of industry partners and guided by pensions and retirement expert Ros Altmann, was conducted among 5,000 people aged 55-70 who had yet to retire or to draw on their private pension wealth . The survey found the following:
75% of people with DC pots aged over 55 said that they would prefer a pension that will deliver a guaranteed income for life, rather than a plan whose value depended on the fluctuations of the financial markets. Half said that they wanted their guaranteed income to be protected against inflation. But disappointingly, only two in every five in this group have yet to make any retirement plan.
Those closer to retirement were more likely to have made a plan, ILC says, but even among those who were less than 1 year from retirement, more than 4 in 10 had still not made one.
Reassuringly, perhaps, only 7% of those interviewed said that that paying for big ticket items such as holidays or a car was the most important thing on their agendas, but another 5% said that paying off debt was the biggest priority.
There was more confirmation of the risk-averse trend when the interviewees were asked what proportion of their pension fund they could afford to lose. The most commonly given response among DC pot holders was none at all (35%). Only 7% thought that they could afford to lose 20% or more of their fund.
The misunderstandings continued. Only 20% of those with DC pots understood what an enhanced annuity was, and only 35% said that they understood what income drawdown was. Women were consistently found to be less financially aware than men and therefore most at risk of confusion from the new pension freedoms
Dr Ros Altmann said:
“It is clear from the research that there is an urgent need to help people understand more about how pensions work, and what their options are when deciding how to make best use of their pension funds. Even after decades of pension saving, many people have no understanding of the most important aspects of the pension system, which leaves them at risk of making poor decisions.
The opportunity of more freedom and choice in future has the potential to deliver better value from retirement savings, but much work still needs to be done to help savers understand their options.”