Freedom of choice at retirement is placing a huge financial responsibility on unsophisticated saver.
Recent research from Columbia Threadneedle has highlighted just how overwhelmed people nearing retirement feel about the financial decisions they face.
The poll of 838 adults aged over 55 found that people planning their retirement are confused about how they will convert their pensions savings into income and how long their savings might last.
More than a third of those questioned said they have yet to make a decision on how to convert their pension pot into income, with 17 per cent saying this was because they did not trust the pensions and/or investment industry. Fourteen per cent were not prepared to pay for financial advice.
The asset manager believes automatically enrolling people into a regulated retirement investment solution such as income drawdown could help those struggling to navigate the complex task of planning for retirement.
So far, auto-enrolment for workers has proved a huge success when it comes to uptake, with more than nine million employees signing up for a workplace pension since its launch in 2012.
But would automatically placing those nearing retirement and unsure of what to do with their pension income into a drawdown product help engagement, or incur additional risks from remaining invested?
Hargreaves Lansdown head of communications Danny Cox says forcing people into drawdown at retirement would be “madness”.
Cox says: “Drawdown needs to be a choice the investor makes and should not be an automatic option.
“I don’t believe that any sensible pension provider would do it, as it’s shoehorning clients into a solution that might not be right for them when they should be in something different – the obvious choice is taking an annuity.
“When people approach retirement they need to be engaging with their retirement choices and making their decision based on their circumstances and their attitude to risk.
“Annuities may not be as popular as they were, but they are still a perfectly viable way for people to draw income from their pension. By defaulting people into drawdown, you could be putting them into something that is not appropriate for them.”
Replacing the old system with nothing was deeply flawed
However, Trades Union Congress policy officer Tim Sharp, says that auto-enrolment into drawdown would help people struggling with the myriad of options they face at retirement without running unnecessary risks, as long as systems were regulated properly.
Sharp says: “Since the beginning of the pension freedoms we have said that blowing up the old system and replacing it with nothing was deeply flawed”.
He adds that the current approach assumes that inertia is the driver when people are saving, and suddenly people become highly sophisticated investors when they reach retirement age.
“There’s a huge burden placed on those now entering retirement, so I think an auto-enrolment approach is sensible,” Sharp says.
“The risks are that they simply become another mechanism for the less progressive elements of the asset management industry to skim off people’s retirement savings. So it’s important that we get regulation and governance right so people are protected.”
Signpost Financial Planning director Nigel McTear says that although he understands the need for saving and engagement, unadvised auto-enrolment into drawdown at retirement could potentially be a disaster.
He says: “It’s very hard to see how it could work with the financial advice market as it is today. I have fears for the industry as a whole, where hit or miss drawdown is effectively the norm.
“You are going to have all these people with these small pots, which no adviser is going to be terribly interested in getting involved with. The amount going in is typically going to be hundreds a year, with not a lot in them at the end. The cost of running a drawdown client is very tricky if there is less than £100,000 in the pension pot.”
Cutting advisers out of the loop?
While an automatic drawdown system could potentially reduce the need for professional advice, Cox doubts this is will happen.
He says: “Although it could technically cut advisers out of the loop, in practice there are always going to be plenty of consumers who lack confidence and understanding, or who want help and advice around their retirement options.
“The people who end up defaulting into drawdown are probably the type of people advisers would not be helping in the first place.”
McTear says: “I don’t think there are that many advisers with clients in drawdown who have really modelled it properly and made sure the rate of withdrawal is sustainable.
“A lot of it is being done with the client determining how much money they need, almost without regard to how much money they have got in their pension pot.
“I think there are enough problems with advised drawdown already, let alone unadvised drawdown.”
As Money Marketing went to press, the FCA was planning the imminent release of the results of its review into the non-advised drawdown market.
The FCA launched an investigation in April 2017 over how non-advised sales were communicated to clients. The regulator has assessed both pre and post-sale materials given to customers, as well as the training materials and telephone scripts pension providers have relied upon.