10 July 2023
If you are covering the DWP publication, ‘Helping savers understand their pension choices’, please see the following comment from David Denton, technical consultant at Quilter Cheviot:
"A time when the majority of people simply retired and started to access their final salary pension, which would give them an income throughout their retirement without concern it was going to run out is largely a thing of the past. Due to pension freedoms and the growing dominance of defined contribution pension schemes, people’s strategies for taking income from their pensions are now of paramount importance so it is right the government explore ways to ensure people do not make the kinds of mistakes that land them in poverty in later life.
"Decumulating from a pension can be treacherous, particularly without expert help and savers can easily see their retirement pots run dry before they pass away.
"The government have not gone as far to propose exactly what products and services should be offered by providers but are intonating a framework to work from to improve the market.
"One area it is heavily encouraging is the inclusion of Collective Defined Contribution (CDC) plans. CDCs aim to provide a halfway house between defined benefit and defined contribution pensions by providing a regular income and addressing issues related to market volatility and sustainable withdrawal rates. While these are important concerns as people often underestimate how much they can safely withdraw from their pensions without running out, CDCs are largely unproven and are not the reality for most people today. Furthermore, they will only impact the workplace pension market, and won’t serve people with individual personal pension arrangements.
"But this is not the only area of focus as the government is keen to ensure savers get value for money too and a good deal from their pension schemes. This includes clear disclosure of investment performance, costs, and service quality. The government is also proposing safeguards for savers during the decumulation phase to ensure that they're not taking on too much risk or paying excessive fees.
"While this focus is no doubt well-meaning it misses a critical point, which is that too many people are still not saving enough into their pensions in the first place so their decumulation plans already start from a difficult point. According to the 2022 Financial Lives Survey by the FCA, just under half of people aged 18-54 have reviewed their pension pots in the last year, compared with 65% of those aged 55-64. This is worrying as it’s the younger generations that need to have more of a focus on accumulation while they still have time.
"We need to view the retirement market holistically and ensure that more savers are engaging with their pensions earlier in life. The consultation shows that the use of financial advice remains low and that a significant portion of adults aged over 50 did not compare providers before accessing their pension, and many were unaware they could switch providers or simply didn't consider it. Giving more people access to advice or guidance in differing formats throughout their financial lives would improve the market immensely."
