Better guidance means better retirement decisions

Prior to the pension freedoms introduced in 2015, people still had some choices to make when it came to their retirement income, and they could make some good choices or not so good ones.

The downside risk of a poor decision is now far greater – for some people it will be catastrophic

For example, they could choose whether or not to add a spouse’s benefit to their annuity, or they could choose if they wanted their annuity to escalate or not. The difference in outcome between a good choice and a poor one usually related to the level of income payable. Certainly significant, but not catastrophic.

Nowadays, someone can make a good decision that allows them to make their money last in retirement, or a very poor one – such as investing in a scam – leaving them with nothing at all. The downside risk of a poor decision is now far greater – for some people it will be catastrophic.

With that in mind, improvements could be made to the retirement market, and the first one is to keep up the fight against scams. A big part of that is raising awareness, and regulators are doing a good job in this area with their recent campaign and proposed cold-calling ban.

Savers not cashing it all in... yet

Aside from scams, many of the initial fears of the pension freedoms have proven to be unfounded. There are plenty of people cashing in, but 87 per cent of these are for pots worth less than £30,000 and would have provided very limited income anyway.

At an average of 5.9 per cent, withdrawal rates under regular income drawdown are higher than most advisers would recommend, but some would argue this is commensurate with the market highs we have seen over the last couple of years. Time will tell whether people reduce their income when markets fall.

Equally, 60 per cent of those entering drawdown have purely done so to access tax free cash, with no regular income. So we have yet to see what the majority of people do when they start withdrawing retirement funds in earnest.

Perhaps the most worrying aspect of the recent FCA study was the number of people investing in cash. Many people have withdrawn their pension pot and placed it in a low-interest bank account or cash Isa. If it is to be used in the short term, this would make sense, but if not, then the harsh reality of inflation risk will soon take its toll.

Savers must be warned over retirement dangers

So what improvements can we make? It is important to separate out short-term remedies from longer-term improvements.

In the short term, we must do everything we can to raise awareness of the importance of decision-making, the value of guidance and, ultimately, advice.

People need to be apprised of their options but warned of the dangers, whether that be falling victim to a scam, paying unnecessary amounts of tax or simply languishing in cash over the long term.

The government’s cold-calling ban, the new financial guidance body and the removal of cash as a default option can all help here.

Financial education key to long-term success

The picture is different longer-term. The younger generations being auto-enrolled into workplace pensions today will find trust in providers that are forward-thinking, innovative and, ultimately, easy to deal with.

That means they will expect accessible online services available entirely through smart devices. The pensions dashboard will be the start of that wave of digitisation.

Recent research from Standard Life and Explain the Market indicates that millennials will first turn to their mum for advice, followed by dad and, ultimately, a professional adviser. So we will need to arm people with greater understanding and insight, whether for themselves or their family.

Younger generations have more time ahead to save, so they will likely have bigger defined contribution retirement pots. This means they will have more to gain from making good decisions – and more to lose. We must work hard to engage them long before this day arrives.

Jamie Jenkins is head of global savings policy at Standard Life