Most DC savers who have exercised pension freedoms have no regrets at what they have invested in but many face significant risks in future, a two-year investigation into savers’ attitudes has found.
A qualitative survey of DC savers with little or no DB underpin found over-55s that accessed pensions for spending on gold coins, hot tubs, new cars and foreign holidays, or have withdrawn their cash to put it on deposit, taking a significant tax hit, generally have no regrets over their decisions.
The research, conducted for State Street Global Advisors and The People’s Pension by Ignition House, was based on interviews with people between the age of 55 and 70 with pots of between £30,000 and £150,000 for whom their DC savings will be their main source of income. Research company Ignition House contacted 80 people interviewed a year ago to see how the decisions they had made following the introduction of pension freedoms had affected them. Around 55 respondents engaged with the survey again a year later.
The survey identified seven key types of DC investor – the largest group of which was those who had decided to do nothing and leave their money where it is. Of the other six groups, the group most at risk of poor outcomes in future was identified as being procrastinators who are attempting to absorb information on the decisions they need to make but are overwhelmed by the complexity they face and have no way of validating if information they have received is true. This group would benefit from earlier access to Pension Wise and innovations that will make advice cheaper and easier to access.
Also at high risk of poor outcomes are the group of those who have lost all faith in pensions, perceiving them as complex and risky. This group think they can do better by withdrawing their cash and placing it in a cash Isa or high interest deposit account, without understanding the impact this investment strategy will have on their residual pot. This group are so disillusioned with pensions that they have accepted a significant tax hit to get ‘control’ of their money. They are also vulnerable to scams.
Other groups identified in the research have turned to buy-to-let, or opted for secure income.
Ignition House director Janette Weir said: “Most have left their money where it is, parking it for some reason or other. Some have taken cash. Some are looking at their annual statements and seeing the income hasn’t changed from year to year so they think their pension is doing nothing for them.
“There is so much more complexity post pension freedoms and for certain groups making this decision is too difficult. They will need help, from the provider, master trust, or employer, that will take them down a well-governed default route. Without this they will make a decision without understanding what it is they have done.
“There is a small group who wish pension freedoms hadn’t happened.
“Those who have cashed in have dealt with investment risk but they are not dealing with inflation risk or longevity risk. As to political risk there is a sense that now George Osborne is gone the political risk is reduced.”
The People’s Pension head of policy and market engagement Darren Philp said: “We can see positives and negatives here. The fact most people have no regrets is positive but people live for the here and now and only time will tell whether they have made the right decision.
“Expecting people to engage is never going to work. The government needs to think about products that default people into a sensible solution.”
SSGA senior DC strategist Alistair Byrne said: “The individuals in our sample have good reasons for approaching decisions in the way that they do. But, we are conscious that there are also potential pitfalls and some of the members risk getting a poor outcome.”