The Work and Pensions committee has delivered a report on how people are using their pensions savings after the age of 55.
When someone reaches that age, they can choose to use money they’ve saved in a defined contribution pension in one of three ways: as cash, to buy an annuity, or to keep it invested but gradually withdraw money (also known as ‘drawdown’).
The new rules were introduced in 2015, so it’s only now that we are starting to see genuine trends start to emerge.
The report found that, for the most part, people are not squandering their savings – but there is evidence that individuals are taking out all of their money and putting it into low-performing cash accounts, rather than ensuring that their savings grow at the very least in line with inflation.
It also found that people are entering into drawdown arrangements without really understanding the risk implications, or at what rate they can safely withdraw money to make sure it lasts them over the rest of their lifetime. In fact, according to new research by Zurich UK, a third of people using drawdown to fund their retirement have no investment experience, though two in five of those have not received financial advice or guidance.
The firm found that almost half a million people are taking advantage of new pension freedoms to draw down their retirement savings, yet the highest proportion have never actively invested in the stock market. Despite being first-time investors, tens of thousands of them have not approached regulated advisers for guidance, even though the average drawdown pot is valued at £153,000.
The study further warned that a lack of advice and guidance could leave retirees at risk of running out of money in retirement. Making poor decisions in drawdown could result in consumers taking on too much risk, missing out on investment growth and potentially making unsustainably high withdrawals.
The research illustrated that women in particular were more likely to be first-time investors at 41% compared to men at 29%.
What does it mean for business?
Given that most people will still be in work at the age of 55, and for another 10-15 years after that, everyone needs to be able to make well-informed decisions about how to use their retirement savings. Someone who withdraws all their pension as cash at 55 and is left with nothing a decade later is unlikely to be in a position to retire! Helping employees to understand what options are available to them will help with good decision-making, and can also make staff feel more confident about their retirement options and prospects.
The government is keen to encourage workplace financial education and Brunsdon Employee Benefits Ltd. is a specialist in this area. Your Brunsdon Financial Adviser can help you to explore what information and support staff need as they approach 55, and the best way to deliver it to your workforce. Please contact us if you need help.
Please note that this information is for guidance only and does not constitute personal advice. Brunsdon is not responsible for the content of external web sites.