How freedom and choice reshaped retirement – and what we can do next

Pension freedoms have given millions of defined contribution (DC) savers greater control over how and when to access their pension pots. While this flexibility has been welcomed, it’s come with significant new risks and complexity that have reshaped the retirement landscape.

New challenges facing DC savers

Before 2015, most retirees used their DC pension savings to buy annuities, providing a guaranteed income for life. Now, fewer people choose annuities, with most withdrawing money as and when they need it – and often without formal advice or a long-term plan.

This shift has made retirement more complex and exposed more people to risks they may not fully understand, such as outliving their savings or making poor investment decisions.

Auto-enrolment was highly effective at building pension savings by leveraging behavioural economics to support inertia-driven accumulation. However, the decumulation phase – where savers must actively make decisions – lacks the same support structure. It demands a level of engagement and financial literacy that many people are unprepared for.

According to Financial Conduct Authority (FCA) research, many consumers lack access to suitable financial planning services, particularly those with smaller savings (generally under £250,000), and this issue has worsened. The Money and Pensions Service estimates that around half of those accessing DC pots in 2020-21 did so without regulated advice or Pension Wise guidance.

Given the complexity of decumulation decisions and limited access to quality information and advice, sub-optimal decisions are common.

FCA data shows that, in the six months to March 2022, a third of people withdrew money just to move it into cash, forfeiting long-term growth potential.

Our groundbreaking ‘New Choices Big Decisions’ research also found that many savers opted for drawdown simply as a by-product of accessing tax-free cash, often postponing decisions until they felt mentally ready, favouring the path of least resistance.

Default to decumulation: a smarter path to retirement income

There’s an urgent need to reconnect DC savings with their core purpose: to deliver a secure, long-term income that meets spending needs throughout retirement.

Too often, pension pots are treated like savings pots – accessed sporadically or used for lump-sum withdrawals without a clear income strategy. The gap between saving and spending needs to be bridged, especially as DC pots become the primary source of income for more retirees.

Research by Hymans Robertson shows that 75% of DC savers aged over 55 would find it helpful if their pension automatically started paying them an income when they retire.

The Pensions and Lifetime Savings Association forecasts that over 40% of future retirees will rely primarily on DC savings as their main retirement income, with median pot sizes set to grow significantly over the next 20 years.

Leveraging pension providers’ expertise to offer a range of products and defaulting members into suitable options can enhance retirement outcomes.

The Department for Work and Pensions (DWP) has already recognised this, and proposed that trust-based schemes offer or partner with decumulation service providers. This would help ensure members are not left to navigate their retirement choices alone.

Evidence supports this shift: research by Hymans Robertson shows that 75% of DC savers aged over 55 would find it helpful if their pension automatically started paying them an income when they retire.

This is where a default decumulation solution comes in – one that mirrors the simplicity and success of auto-enrolment. A ‘do-it-for-me’ approach would help savers transition from accumulation to income without making complex or irreversible decisions.

A reality check

We are now far more realistic about the behavioural science behind retirement decisions. Expecting consumers to make rational, long-term financial plans in the face of uncertainty and declining cognitive ability is unrealistic. Many people don’t want to make complex decisions at retirement. They want something simple, stable, and secure.

A well-designed solution must reflect this reality, meeting three key consumer needs:

1. Sustainable regular income: Consumers want income that is inflation-protected, stable and lasts for life. This means managing longevity risk and avoiding overly volatile withdrawal strategies.
2. Flexibility: Retirees need to adapt their income as life circumstances change, valuing the ability to stop, pause, or take lump sums when needed – particularly in the early stages of retirement when spending is more discretionary. In later life, they are often more willing to trade some flexibility for security and peace of mind.
3. Simplicity: People don’t want to make complicated decisions or actively manage their income plan year after year. The solution should be easy to understand, involve no ongoing maintenance, and protect against the cognitive decline that naturally comes with ageing.

The industry has a collective role to play in designing retirement journeys that support good outcomes – regardless of how actively engaged the member is.

Bridging the gap

The default accumulation journey has helped millions of savers build pension wealth with minimal effort. We need a similarly intuitive path through retirement, with a well-designed default decumulation solution that extends the auto-enrolment ethos into retirement.

It should align investment strategies between accumulation and decumulation; present a single, cohesive customer journey; and remove unnecessary decision-making barriers.

Product-wise, no single solution will meet every need across a 30-year retirement. That’s why a phased approach – starting with drawdown and transitioning to a guaranteed income, like an annuity – may offer the best balance. It provides ownership and flexibility when it’s needed most and delivers security when it’s needed most.

Striking the right balance

While engagement is a key factor, we can no longer rely on engagement alone to drive good member outcomes. We must design solutions that reflect how people behave. The aim should be to re-establish a strong link between DC pensions and dependable income, making the optimal path the default, as it is during the accumulation phase.

Crucially, the responsibility must not sit solely with the individual. The industry has a collective role to play in designing retirement journeys that support good outcomes – regardless of how actively engaged the member is.

Kirsty Ross is proposition director at People’s Partnership, provider of The People’s Pension.