A generation sleepwalking into retirement poverty

Older savers are clueless about their pensions and most will run out of money in retirement, damning research today reveals

Older savers are clueless about their pensions and most will run out of money in retirement, damning research today reveals. 

An exhaustive study from the pension industry found savers were too scared to check their pots, and underestimated how long they will live. 

Workplace savings firm the People’s Pension warns that the nation is now sleepwalking into retirement — nearly six years after the pension freedoms were introduced. 

Its report, unveiled for the first time in Money Mail today, lays bare the ‘binary’ choice pensioners currently have between costly financial advice — or going it alone. 

The research, which has involved in-depth interviews with sample groups of savers since 2015, says those nearing retirement need more help to get it right. It found: 

  • Three in four savers are on track to run their pension dry in retirement. 
  • Savers are put off planning for the future as they fear the ‘truth’ — with just one in ten making detailed money plans. 
  • Just one in 20 considered how inflation will eat away at their savings. 
  • No savers thought they’d live to 100 and beyond — despite statistics suggesting one in ten 65-year-olds will do so. The pension freedoms of 2015 gave savers the choice to do what they wanted with their pots from the age of 55. Previously, they would almost always have had to use their pots to buy an annuity — providing them with a guaranteed income for the rest of their lives. 

Now, most retirees choose to keep their pension money invested and draw down an income — perhaps after taking a 25 per cent tax-free lump sum. Since the freedoms were introduced in April 2015, nearly one million pensions have entered drawdown. It allows savers to keep their pension invested and take an income from it — experts recommend no more than 4 per cent a year. 

However, if it is not invested efficiently or too much is taken out, the saver could quickly deplete their pot. Yet the People’s Pension says most are likely to make ill-informed investment choices and take money out too quickly — meaning most will be solely reliant on the state pension by their mid-80s. 

The firm also warns that not nearly enough savers were clued up about how they should best invest and access their retirement money. The behavioural research, done in conjunction with asset manager State Street Global Advisors, says savers can only choose between making decisions themselves or paying for ongoing financial advice. 

Workplace savings firm the People's Pension warns that the nation is now sleepwalking into retirement - nearly six years after the pension freedoms were introduced

Workplace savings firm the People’s Pension warns that the nation is now sleepwalking into retirement – nearly six years after the pension freedoms were introduced

The authors said most were going it alone, and ‘doing the best they can, given the impossible task’. Yet the report found their choices often appeared ‘illogical and irrational’, adding: ‘Members going it alone are riddled with behavioural biases that prevent them from thinking about their later years, they struggle with numbers, they have no knowledge of investments, and consistently misunderstand or are ignorant of the risks they face. This situation is far from ideal.’ 

The People’s Pension says financial advice on a drawdown pension plan will, on average, be charged at 2.4 per cent on the amount invested — and then 0.8 per cent per year from then on. Savers will also have to pay fund management fees. It means a saver with a £100,000 pot will lose thousands to fees in retirement. 

Raiding my pot to revamp kitchen was a big mistake 

Paula Lewis (below) did not start saving into a pension until she was 40, and now accepts that she will have to keep working into her 70s. Paula, 59, has combined pension savings worth £20,000, after taking 20 per cent out three years ago under the pension freedoms. The mother-of-one, who lives near Worthing, West Sussex, says: ‘I do think I have been sleepwalking into retirement.’ 

The communications specialist took out the tax-free lump sum in 2017 to redecorate her kitchen before putting her house on the market. Paula says: ‘I wasn’t thinking that a minute amount was going to help me in my old age and I needed to take a really quick and easy decision. I didn’t really think beyond that. 

‘I knew I was entitled to take it and decided to do so once I saw how much was in there.’ 

She has since used Pension Wise, the free government advice service, but says she was left feeling confused. She adds: ‘I have to say this guy I spoke to really earned his stripes as we spoke for a long time. 

‘It was complicated and convoluted and he still couldn’t give me advice — he just gave me options. 

‘If I am talking to my bank manager about taking a loan, I will be told how much I need to pay back and by when — it is much more straightforward. People like to be led. Sometimes pensions are mired in all sorts of complicated stuff.’ 

Paula, who is now mortgage-free after downsizing, says: ‘I still look at what I have in my pensions and at what I am going to get from the State in retirement. It’s fairly depressing.’

Phil Brown, from not-for-profit group B&CE, which runs the People’s Pension, says the report ‘fills a big gap in our understanding of how pension freedoms are working in practice’. 

He adds: ‘A significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided. 

‘People would be dismayed to arrive at a car dealer’s forecourt to buy a car, be presented with a selection of parts and told to a pick a selection and build their own vehicle — so why do we expect pension customers to do exactly this?’ 

Alistair Byrne, of State Street Global Advisors, says: ‘This research shows clearly the many challenges older savers face when making a decision about their pensions. People struggle to see beyond the near-term future and cannot always access the advice and support they would like.’ 

The research also revealed that those facing retirement want their pension provider to direct them down the best path. It comes as regulator the Financial Conduct Authority has warned that too many pension savers are keeping their money in cash rather than invested in the stockmarket — losing retirement income as a result. 

From next month, in a bid to fix this, those putting pension money into drawdown without financial advice will be offered an investment option to best suit their circumstances by their provider. 

Former pensions minister Baroness (Ros) Altmann says the industry needs to promote pensions better and make its services and products more user-friendly for customers. She says: ‘Pensions are the last money people should spend. 

They are the most precious of all investments. Spend your Isa, downsize your house, use your other investments before you draw on your pension fund. These are simple messages that have simply not been passed on to the public. It is quite astonishing really.’ 

Putting off checking your pension can also mean missing out on an earlier retirement. Jerry Wood, who was one of the 50 savers who took part in the study last year, was 55 before he even thought to check his pension. 

However, after having a look, Jerry, 57, realised he could actually retire early from his job as a sales manager. The married father-of-one, from Leeds, stopped working in April last year — taking a lump sum — and he now intends to draw down the rest. He says: ‘I knew the basics about pensions but it was only when I looked at the finer details, I thought, ‘I can do this.’ ‘     

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