Post-retirement defaults are key to better outcomes

It is a big ask, and your retirement depends on it. To do well would really require the combined skills of an actuary, an economist and an investment expert, all of which are hard to come by on a regular high street.

But while savers can pay for advice to benefit from such expertise, even at relatively low cost, few are willing to do so.

The introduction of the pension freedoms in 2015 was a positive step; people hitting retirement are no longer locked into buying low-yielding annuities.

Annuities simply did not make sense for people with smaller pots, and those with larger pots are likely to be better off by opting for drawdown until their mid-70s, followed by later-life annuities anyway.

Retirement defaults are needed

However, the amount of choice currently available at retirement remains a challenge for many. 

Even where savers are engaged they are struggling. This can lead to some savers just deciding to take any action – most commonly it is to exit pension saving altogether and stick their money in a bank account – without necessarily thinking about the longer term.

Most are keen to do the sensible thing, yet few are confident in their ability to navigate the options available. Many are fearful that a wrong decision could have a serious impact on their financial wellbeing as they get older.

The industry cannot just hope savers will become experts. If they will not seek advice, then we need to offer default options so that people can be confident that, even if they are overwhelmed and unable to decide, doing nothing will not leave them sleepwalking into a poorer retirement.

This is, after all, the model we employ in the saving phase, and it works well.

In fact, research by the Pensions Policy Institute shows that 99 per cent of mastertrust members, and 85 per cent of savers in other defined contribution schemes, have defaulted into, well, a default.

Progress is being made

Encouragingly, the Financial Conduct Authority is exploring the need for defaults, and the regulator could help consumers by endorsing a set of appropriate defaults at retirement.

One thing we should consider is that such defaults would likely require a slightly higher degree of member engagement than when members were saving.

Most members in an auto-enrolment scheme would best be served by a default which allows them to release their money efficiently.

For the foreseeable future, most pot sizes are unlikely to be large enough to generate what most savers consider a worthwhile income.

But pot sizes will grow as pensions mature, and drawdown products are likely to come to play the role of principal default in auto-enrolment schemes too.

Engagement matters

This is not to say that member engagement is not worth pursuing. There is a minority of members that want to exercise choice.

Hopefully, with the roll-out of the pension dashboard, there will be many that will become comfortable with making financial decisions.

But while greater member engagement is welcome, we must not forget that there will always be members who are unwilling, or unable to engage with financial decisions. The wrong engagement at the wrong time could be disastrous for savers and lead to some pretty poor outcomes.

Right now, faced with a daunting array of options, many retirees are simply cashing in their pensions.

They risk being hit by a hefty tax bill, missed investment growth and a loss of the other benefits that come from having a pension when you really need it.

Better member outcomes are what the industry is rightly striving for. Extending high quality defaults into retirement, and creating the regulatory environment to support this, has to be our next step towards that goal.

Darren Philp is head of policy and market engagement at mastertrust The People's Pension