Many people near retirement age still do not understand their options or how to exercise them, after almost a year of so-called ‘pension freedom’, while many are also unprepared, according to new research from unbiased.co.uk.
The research found that 26% of those aged 55+ had no form of retirement savings at all, and 30% of the same age group say they have not yet considered their retirement finances.
Awareness of the different pension options was low. The option most understood (by 23%) was the ability to take the whole pension pot as a lump sum. Fewer still understood the various ways to allow retirement savings to grow. 18% understood the option to take a tax-free lump sum and leave the rest invested. Just 17% knew that they could top up their state pension, and only 14% understood drawdown.
Karen Barrett, chief executive of unbiased.co.uk, said: “Some of the changes are filtering through to people, but the option that seems to have sunk in the most is the riskiest one – taking the whole pension as a lump sum. Annuities are not right for everyone, but our research reveals huge swathes of people who are not thinking about the bigger picture.
“It’s extraordinary that 30% of over-55s haven’t even considered their retirement yet! More needs to be done to ensure people do not act in haste and repent at leisure. Many could end up with a huge tax bill they did not expect.”
Among those who claimed some understanding of their pension options, only 25% said they were likely to exercise one or more, while 42% said they were unlikely to do any of them. This response again highlights the profound lack of understanding around pension freedom, given that these individuals would have to take at least one option.
The research highlights the increasing importance of professional advice in the run-up to retirement. 60% of non-retired respondents said they would not be confident exercising any pension option without professional advice. Confidence was lowest (8%) for drawdown.
Barrett addd: “Pension freedom has the potential to revolutionise retirement from here on. However, it can only do that if people feel ready to take advantage of the new options and use them wisely. It seems clear that this is still a long way off. Our research paints a picture of retirees who just don’t know what to do, and so are likely to end up doing nothing, or just taking the first option presented to them. This situation needs to change, or the gap between the advised and the non-advised will just continue to widen.
“Recent government figures revealed that each Pension Wise session costs the taxpayer nearly £500 – far more than an initial meeting with a financial adviser. There is now a risk that many who in the past might have paid for professional advice may now opt for free guidance instead. Though useful, guidance is limited in scope – it cannot assess an individual’s financial position, cannot recommend a course of action and cannot source products – all it can really do is explain. Most people will find they still need professional financial advice in order to make confident choices.
“With an adviser you have recourse if you make the wrong decision; with guidance there is nothing. It’s no wonder so many people don’t understand their options and are now bogged down in indecision. The freedom is out there, but they need help to go and get it.”