Pensions ticking timebomb: study reveals savers sleepwalking into retirement six years on from Pensions Freedoms

Nearly six years on from the introduction of Pension Freedoms1, new research has shown that older savers are sleepwalking into retirement and risk running out of all their Defined Contribution pension savings with a third of their retirement still ahead, meaning they could  spend their final years reliant on the state pension.

Leading workplace pension provider The People’s Pension2 and asset manager State Street Global Advisors3 have today published the latest findings of the New Choices, Big Decisions4 study, which examines both retirement planning and spending habits following the introduction of Pension Freedoms in 2015. The in-depth research by the consultancy Ignition House, reveals that people facing retirement want their pension provider to give them a safe guided path into retirement, rather than the complex array of decisions with which they are now faced.

The new research centres around interviews with 50 savers, including 30 people who took part in the first study in 2015, who are either approaching retirement or have already finished their careers. The study shows that, because pensions freedoms have compelled people to put together their own retirement solutions, 74 per cent5 of those interviewed are spending their pension savings at a speed, which at best, means they will run out of money in their mid to early 80s, even though many will live into their 90s.6

The research reveals how policy makers and the industry have built a system that could only work effectively based on unrealistic assumptions as to how people behave. The work by Ignition House maps out the massive discrepancy between expert assumptions and actual behaviour.7

 Key findings include:

  • Savers are scared of planning for the future as they don’t want to discover the ‘truth’
  • They underestimate the financial risk of growing old and don’t understand how inflation can impact their savings
  • The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up

Phil Brown, Director of Policy and External Affairs at B&CE, the provider of the People’s Pension said:

“This research shows why policy makers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for, and which will ensure that DC pension savers have an income throughout their retirement. There is evidence that 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?

“This report fills a big gap in our understanding of how pension freedoms are working in practice.”

Alistair Byrne, of State Street Global Advisors said: “This research shows clearly the very many challenges that older savers face when making a decision about their pensions. People struggle to see beyond the near-term future and cannot always access the type of advice and support they would like. As an industry we need to continue simplifying what we offer, providing guidance and support, and easy paths to follow, whether we call them ‘defaults’ or not.”