The freedom not to choose

The introduction of default decumulation options has been recommended by the Work and Pensions Committee, and even before that has had prominent advocates.

Even those who have welcomed the pension freedoms admit default solutions would help solve issues around poor decision-making. The Centre for Policy Studies, the thinktank that was a driving force behind the introduction of the freedoms, last year proposed a model of auto-drawdown at 55 and auto-annuitisation at age 80.

Consultancy Aon meanwhile has said a proposal it made for the Australian market – which was rejected due to tax issues – could work well in the UK. It would include a regular income from drawdown with a flexible cash account alongside it; at age 85, the remaining pot could be annuitised.

Introducing a default retirement option would clearly make sense. Many savers, except for perhaps the very wealthy, are overwhelmed by the choices they face.

When they do make a choice, it might well be an uninformed one – almost a third of those going into drawdown did so without taking financial advice, the Financial Conduct Authority found last year, and it pointed out that accessing pots early has become “the new norm”.

Some argue that trustees and providers would run a legal risk if they defaulted a retiree into, say, a drawdown option.

Precisely why this risk should be higher than deciding on the best way to accumulate savings – which DC schemes already do – remains unclear.

A default retirement option could bridge the gulf between the disengagement among savers during the accumulation phase and the sudden call to action at retirement, which the Pensions Policy Institute has described as a “dichotomy” in the system.

Maintaining this gap makes no sense. Retirement defaults could be just what is needed to inject some continuity.

Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWKand the team @pensions_expert.