Thirty-two per cent of people in drawdown do not have any investment experience, yet two in five of them have not received advice or guidance, according to a recent report that urges the introduction of drawdown MOTs.
Financial Conduct Authority research has previously shown that twice as many pots are moving into drawdown than annuities, amplifying the scale of the problem.
Anyone going into drawdown should first seek advice and should ideally receive advice on an ongoing basis
Steven Cameron, Aegon
Before the pension freedoms, introduced in 2015, more than 90 per cent of pots were used to buy annuities.
Many in drawdown lack investment experience and advice
A study of almost 750 people, published by provider Zurich on Wednesday, found that a third of people using drawdown to fund their retirement have no investment experience – yet, 41 per cent of these first-time investors have not received either guidance or financial advice.
There is also a drawdown gender gap, with women in drawdown reporting lower levels of investment experience, financial confidence and engagement, compared with their male counterparts.
Source: Zurich
It found that 29 per cent of women are likely to be first-time investors, compared with 41 per cent of men.
The report recommended that there should be an FCA or select committee inquiry into the impact of gender on retirement outcomes in the new pensions landscape.
Despite few savers in drawdown taking advice, confidence appears to be strong, and consumers are embracing the freedoms.
The research found that almost seven in 10 people are confident that their pension in drawdown will last for the whole of their retirement. Given a second chance, 81 per cent of people said they would still put their pension into drawdown.
Consumers who have not sought any advice are twice as likely to express uncertainty over their decision, compared with those who are getting ongoing advice, according to the study.
In January, the government removed an amendment to the financial guidance and claims bill that would have auto-enrolled people into guidance as they seek to access their pots or transfer benefits.
The Zurich report urged the government to reconsider the case for introducing mandatory guidance for drawdown, requiring non-advised consumers to either opt in or out of receiving guidance before accessing their pension.
Bring in drawdown MOT
The report also called for the forthcoming single financial guidance body to offer non-advised consumers a drawdown MOT at age 74, ahead of 75, when the taxation of pension death benefits changes.
Alistair Wilson, Zurich UK’s head of retail platform strategy, said in the report that the need for financial advice and guidance is greater than ever, and will rise as the population in drawdown grows and ages.
“Understanding what more can be done to encourage consumers to seek advice or guidance is crucial to helping retirees secure a decent, lifelong income,” he added.
Steven Cameron, pensions director at provider Aegon, said: “Anyone going into drawdown should first seek advice and should ideally receive advice on an ongoing basis.”
He sees merit in providers communicating to people aged 74 that the taxation of pension death benefits changes at age 75, “so that they are aware that things are about to change and they might want to reconsider what they’re doing”.
He suspected that if people are forced to seek guidance late in the process, it will not be particularly effective as many individuals will have already made their minds up by then.
Drip feed savers
Cameron suggested that an engagement programme that starts earlier in the retirement journey and drip-feeds information to educate people along the way would be more effective.
When they reach age 50, “you begin to highlight to them the different options that they will have, and so you don’t leave it all to the point at which they decide, ‘I’m going to retire and I want to take drawdown,’”, Cameron said.
However, this kind of process would require careful thought and planning, to make sure that alerting members at 50 would not encourage people to draw down their pension pots early, for example.
Mark Futcher, head of workplace wealth at consultancy Barnett Waddingham, pointed out that “most [people] just go into the offering that is on the table”, choosing a drawdown policy with the provider that they have been accumulating with, for example.
“Members are not going to do their homework and that kind of shopping around,” he said.
Futcher agreed with the idea of a drawdown MOT, adding that he would welcome more prompting and nudging every year.
“It’s about managing the risk of ruin,” he said.
