Most retirees are unlikely to seek advice before withdrawing their pension, a survey has shown, as the industry wrestles with how to protect members in the new flexible pensions environment.
All defined contribution retirees will have the right to free guidance at retirement under the pension reforms, but many in the industry have questioned whether delivering close to retirement is too late.
The Brewin Dolphin survey, entitled 'Don’t crash your retirement', quizzed 2,000 people aged 55-65. Of these, 57 per cent said they were 'unlikely' to seek advice on whether to withdraw a lump sum.
Nick Fitzgerald, head of financial planning at wealth manager Brewin Dolphin, said: “[The finding] was quite alarming to us; that’s quite a high percentage of people who said, ‘We’re not going to take the advice’. Potentially that means they’re not going to take any advice.”
The risk of not taking advice, said Fitzgerald, is that people tend to misunderstand how to take their money tax-efficiently.
He gave the example of what could happen to the remaining pension of an individual with a £165,000 pot who took a tax-free lump sum of £41,250.
While he thinks he’s a marginal-rate taxpayer of 20 per cent, by doing exactly what most people are telling us they’re going to do, he’d inadvertently create a tax bill of £50,000
Nick Fitzgerald, Brewin Dolphin
"While he thinks he’s a marginal-rate taxpayer of 20 per cent, by doing exactly what most people are telling us they’re going to do, he’d inadvertently create a tax bill of £50,000,” he said.
At a recent press briefing, Ros Altmann, the government’s older workers champion, said the Financial Conduct Authority had "completely messed up" the advice system for consumers.
"The word advice, we don’t know what it means, ordinary people don’t know what it means," she said. "We have the Money Advice Service that doesn't give advice. We’ve got the Pensions Advisory Service that doesn’t give advice. We’ve got Pensions Wise guidance that the chancellor called advice. It’s not, in the regulated sense, advice."
Annuity distrust
A recent study by the think-tank International Longevity Centre showed 70 per cent of savers approaching retirement wanted a guaranteed income.
However, Ben Franklin, senior research fellow at the ILC, said consumer response was based on how annuities were pitched to savers.
“People see annuities as risky, as they may may die before they’ve taken the full benefit from the annuity,” he said. “So the industry needs to frame it in terms of guaranteed income for life if they want to sell the products.”
And he added that confusion still remains as to what an annuity actually is.
"Only four in 10 of the specific target group that we sat with – people with DC pots on the verge of retirement – said they actually understood what an annuity was," Franklin said.
"Even less [knew] what an enhanced annuity was, what income drawdown is – by comparison to nine in 10 who know what a savings account or a mortgage is.”
The need for education is exacerbated by the pension reforms. But Jane Vass, head of public policy at charity Age UK, said that while pensions guidance, such as the government’s Pension Wise programme, is “absolutely essential”, it was not sufficient on its own.
“We are interested in things like adviser directories,” she added. “But also we’re interested in [whether you can] take some of the noise out of the decision. Can you streamline some of the decision-making for people?"
She added: “It is going to be hugely important that people take advice and that they aren’t rushed into things.”
