Almost half of defined contribution (DC) pension savers in their 50s and 60s haven’t considered how they will access their retirement pot, new research published today shows.
People with low levels of pension wealth are less likely to know how they will access pension, Institute for Fiscal Studies research suggests.
“Large majority” of DC pension savers take their entire pension in one go – but average full withdrawal of £22,600 is “small fraction” of overall wealth.
The post-mini-Budget bond market nightmare shows the damage low levels of engagement can cause to people’s retirement plans.
Tom Selby, head of retirement policy at AJ Bell, comments: “Boosting engagement levels throughout the retirement savings journey, particularly in the run-up to pension access and as savers start taking an income from their hard-earned pot, is crucial as the UK transitions from a system dominated by guaranteed defined benefit (DB) pensions to one where savers have more flexibility and responsibility through defined contribution (DC) plans.
“While on the face of it the fact almost half of DC savers haven’t got a clue how they will access their retirement pot might be a cause for concern, there are some fairly obvious reasons why this might be the case. Anyone in their mid or even late 50s could be a decade or more away from touching their pension, so you wouldn’t necessarily expect them to have considered how they might go about this.
“Furthermore, for the majority of people who choose to enter drawdown when they first access their pension, this point in time will not necessarily require a big change in their investments. For those just accessing their tax-free cash, for example, there might be no need to shift their underlying investment approach at all – although de-risking the portion they plan to access could be sensible.
“Anyone entering drawdown might want to move some money into cash to pay their income and move to a strategy focussed on delivering that income, but again this won’t necessarily mean a big overhaul of their underlying investments.
“Once you start taking an income through drawdown, engagement is absolutely critical, particularly to ensure you are invested appropriately and aren’t risking exhausting your pot too soon. Similarly, for those planning to buy an annuity, engagement at least five years prior is critical to make sure your investments are in order.”