A large proportion of defined contribution (DC) savers are at risk of an advice gap both at and in retirement, according to a new study from Invesco.
This could see them missing out on the advice, comfort or knowledge they need to make the often-complex decisions required to meet their income needs throughout retirement. However, there are real opportunities for positive change, through facilitating guidance, stamping out the fears that are stopping people looking at their pension pot and driving product innovation across the industry.
Invesco’s UK retirement study surveyed 151 retirement focused advisers and 500 consumers with at least £50,000 in DC pensions either at or in retirement. The study found that significant fears about retirement income, product suitability and access to advice could leave many people a long way short of their desired retirement.
The study highlights:
- One fifth (22%) of clients come to advisers too late for retirement planning. The benefits of taking early financial advice and the significant impact it can have on retirement outcomes cannot be overstated.
- An overwhelming majority (79%) of advisers say running out of money is a top client fear. DC pensions increasingly represent the dominant source of retirement income, but the industry hasn’t adapted to the changes needed in retirement today.
- A third (32%) of consumers don’t spend as much of their pension as they could afford because they dislike the idea of their savings going down. Fear of outliving savings may lead to an unnecessarily frugal retirement and a reduced quality of life.
- Half (51%) of advisers aren’t satisfied with current retirement products. Advisers are calling for product innovation to help meet the evolving needs of DC retirees.
- More than a quarter of non-advised retirees (29%) do not actively seek any retirement information. Non-advised retirees need more support to avoid them becoming a ‘lost generation’
The knowledge gap is preventing good retirement outcomes
Pension Freedoms, introduced a decade ago, offer flexibility and choice, but navigating this without expert knowledge or guidance can be incredibly difficult. Advisers point to three major misconceptions among their clients: underestimating how much they need to save (51%), understanding their life expectancy (47%) and miscalculating likely retirement spending (46%). Unfortunately, these misconceptions are often the result of low pension engagement throughout accumulation, and this knowledge gap becomes more evident when consumers begin drawing from their DC pensions.
Awareness and psychological barriers to advice
More than a quarter of non-advised retirees (29%) do not actively seek any retirement information. This highlights the ongoing knowledge gap and engagement issues that persist into the decumulation phase.
The major impacts of this are as much emotional or wellbeing-related as financial. Nearly two-thirds (64%) of advisers say people who seek advice during accumulation have a better understanding of pension options than those who only take advice at retirement. Around half of advisers say these clients are also more confident in their retirement plans (53%) and have more realistic expectations for their lifestyle in retirement (47%). These differences are far more prominent than financial benefits of early advice, like appropriate risk levels (37%) or larger pot sizes (25%).
Mary Cahani, Head of DC Client Engagement at Invesco, says: “Defined Contribution (DC) pensions are increasingly becoming the primary source of income for new generations entering retirement. This shift has highlighted significant challenges related to the uptake of financial advice, the adequacy of pension savings, and the quality of decumulation products. Addressing these issues has become an urgent priority, especially following Rachel Reeves’ Mansion House speech, which emphasized the need for a comprehensive pension review.
“We are observing that collaboration across the industry is vital for maintaining a strong focus on member outcomes throughout the entire retirement journey. Most importantly, it is becoming clear that collaboration and member engagement need to be represented earlier in the process, particularly during the transition from saving to spending so that individuals are better equipped with the necessary advice and guidance when looking to access retirement solutions that ensure an adequate level of retirement income.”
Psychology of spending
Advisers are also concerned that the fear of the unknown is preventing retirees from spending their hard-earned savings. After years of saving, retirees often struggle with the idea of spending their money rather than saving it. This reluctance to spend is often based on deep rooted fears about the unknown. Top concerns are health costs (35%), worry about seeing their savings post diminish (32%) and a desire to leave an inheritance (28%).
The fine line between financial caution and a quality of life they wish for in retirement shows the need for better support for individuals in DC pensions and how professional advice or guidance can help retirees overcome these psychological barriers and provide them with the help and planning they need to better help them achieve their desired retirement outcomes.
Owen Thomas, Head of UK Wholesale at Invesco commented: “The shifting pension and regulatory landscape has meant that decisions around planning for and moving through retirement can be complex and, for some savers, a daunting prospect. We have seen that this can lead to a lack of engagement, that often worsens as individuals transition to retirement, and in many cases, decisions being made that lead to disappointing outcomes for retirees. We have long been proponents of the benefits of seeking professional financial advice and the positive impact it can have not only in achieving better retirement outcomes but in also educating clients on their choices and providing peace of mind surrounding their future.”
Retirement products don’t meet modern needs
Advisers say running out of money is clients’ main fear; half (48%) rank it number one and a combined four fifths (79%) cite it as a top three concern.
This issue is particularly acute for those reaching retirement. The report found a quarter (24%) of people have less retirement income than expected upon reaching retirement age. This is twice the amount of those that are already in retirement (12%). The research also revealed significant additional retirement income gaps for women (19% had less than they expected, versus 11% of men) and those with low pension wealth (18% had less, versus 5% of those with high pension wealth).
Compounding the scale of the challenge is the lack of appropriate retirement products. Just 10% of advisers say they are ‘very satisfied’ with current retirement products, versus half (51%) that report no satisfaction whatsoever.
Three quarters (75%) of advisers say product innovation is important to addressing retirement planning challenges and sustainable income generation (cited by 61%)is their biggest priority. Advisers identify product complexity and suitability concerns as the biggest barriers to adopting new products (56% and 53% respectively rank these as a top three concern).
Georgina Taylor, Head of Multi Asset Strategies says: “Product innovation in isolation will not drive better retirement outcomes, but it is essential that as an industry we offer a broad range of income generating solutions for individuals entering retirement. Alongside product innovation we can help facilitate access to planning tools, guidance and advice to more effectively help people plan for their retirement.
“As an industry we know what the problems are. We now need to collaborate to drive change. We face an increasing population of people in the UK who simply will not have enough to see them through their retirement but collectively we have the skills, knowledge and combined ability to help change that.”
