Articles - Converting savers into pensioners

The ten-year anniversary of automatic-enrolment (AE) is fast approaching. A programme that is generally acknowledged as having been a huge success in turning millions of employees into savers in workplace pension schemes. What has been less successful so far, is converting those savers into pensioners. Pension Freedoms legislation gave savers the opportunity to shape their pension income in a way that suits their planned transition to life after work.

 By  Dale Critchley, Workplace Policy Manager, Aviva
 However, it also introduced more complex decision making and has provided more opportunities for retirees to make potentially costly mistakes. Taking too much retirement income can push someone into the higher or additional rate tax bracket, wiping out tax advantages earned while saving. It can mean that future pension saving is restricted or simply, there is no income left in later life.

 Other decisions are made difficult through the uncertainty of our own mortality as well as the economic outlook.

 The beauty of AE is that it operates via inertia, and that it is a ‘no regrets’ decision for most. While AE is not the complete solution to accumulating a pension fund, it does represent a foundation on which individuals can build based on their own circumstances.

 The same is not true when converting savings into a retirement income. Decisions are more difficult since too much income can lead to poor outcomes, as well as too little. While retirees might generally seek a ‘Goldilocks’ value, it is important to remember that two of the four protagonists in that tale were looking for something different.

 It seems to me there are two routes. The first is advice and guidance, to match the solutions to the individual. Take up of guidance is increasing through the stronger nudge to Pension Wise. However, to have a real impact on decision making we need to look to advice. For some, this will be full, independent advice. For others it could be simplified advice, to reduce complexity and therefore cost, bringing it within reach of savers with smaller pots, while at the same time meeting their specific advice needs.

 The second route is to look at packaged solutions. Investment pathways are perhaps the prototype. They provide an investment solution based on how savers anticipate accessing their drawdown fund. They address the issue of savers - blinded by their tax-free cash lump sum - simply placing their remaining savings on deposit. But it still leaves savers with plenty of work to do if they want their pension pot to sustain them when they stop work.

 Research earlier this year by Aviva, which surveyed around 1,000 savers who consider themselves pre-retired, semi-retired or retired, found their top priorities today are around reassurance, with the main desire to have an income which lasts throughout retirement. Broadly speaking, those who have yet to retire were planning to spend on travel and holidays. Those who have already retired had aims that perhaps more accurately reflect the reality of a three-stage retirement - where early active years are replaced by a more passive but still independent lifestyle and requiring financial support in later life. They gave broadly equal priority to travel and holidays, having the ability to flex their income, and funding care in later life.

 How can pension providers support these lifestyle plans?
 It leads us down a different avenue than Investment Pathways. A more structured solution seems to be needed. At Aviva, we believe this will be based around tax-free cash and drawdown in the early years to provide the flexibility to fund travel and holidays and then pay for unexpected costs as people move into the second phase of retirement. A guaranteed income will be required as people move towards the third phase, where guaranteed support and a lifetime income become increasingly important.

 Savers will need to be guided into making the right decision about the proportion of their pension needed to provide a drawdown income, and how much should be set aside to purchase a guaranteed income in later life. Providers would need to set the date from which the guaranteed income is paid, based on the point at which longevity assumptions make it more cost effective. When it comes to delivering appropriate investment solutions, we see that as a job for the investment experts.

 The challenge - as with anything new - will be engaging savers. Only by listening to savers can providers hope to deliver a solution that savers want to use. Which seems to be one that provides flexibility when they feel young combined with the reassurance they are looking for in later life.


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