The research of 5000 people aged 55-70 found that guaranteed income was seen as “most important”, with nearly 70% of all those with DC pension savings wanting to use their pot to deliver a guaranteed income, particularly an income protected against inflation. Just 7% said that paying for big ticket items such as holidays or a car was most important, and 5% said paying off debt was the priority.
Three quarters of people (75%) across the entire survey agreed with the statement “I would prefer a secure guaranteed income over an income that might rise or fall depending on financial markets”.
When asked what proportion of their pension fund they could afford to lose, the most common answer amongst those with DC pots was none (35%). Just 7% thought they could afford to lose 20% of their fund or more.
While consumers want income security many are confused about options. Only half those with a DC pension said they understood what an annuity is quite or very well, only 20% understood what an enhanced annuity was, and just 35% said they understood what income drawdown was.
Women were consistently less financially aware than men on all measures and are therefore most at risk of confusion from the new pension freedoms.
Across the entire survey just 4 in 10 had made a plan. Those closer to retirement were more likely to have made a plan but even amongst those who were less than 1 year from retirement, more than 4 in 10 had still not made one.
It is a similar story for those with DC pots. 4 in 10 of those who are less than 1 year from retirement have not yet made a plan, and only 1 in 5 people understood what marginal tax rate was.
When pressed on how to reduce their tax burden when withdrawing money from the pension pot, only half gave the correct answer that you should withdraw it in small amounts over a number of years. 1 in 10 wrongly thought that the best thing would be to withdraw as one big lump sum.
On launching the report the Government’s Business Champion for older workers, 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. Promoting take-up of the new Guidance service will be vital to help millions of men and even more women make the most of their hard-earned pension savings”
Commenting on the results, ILC-UK Chief Executive, Baroness Sally Greengross said:
“These results underscore the significant challenges that lie ahead. By April 2015, we will need a fully functioning Guidance Guarantee which supports the high proportion of pension savers who have low levels of financial capability and who are confused about what to do in the face of these new freedoms.
"But Guidance alone will not be enough. An advice market that works for the many and not just the few is also needed – including mass market advice that meets the needs of those with limited to moderate net wealth. And critically, there is an urgent need to determine how we support those who fail to take Guidance or for those who take Guidance but are still liable to making poor decisions”.
