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Consumers ‘do not understand retirement income options’

Over half of consumers do not understand the retirement income options available to them, a major survey has found.

An ILC-UK poll of 5,000 people aged 55 to 70 who are yet to retire or draw down on their private pension found just 35 per cent of those with a defined contribution pension understand what income drawdown is.

Furthermore, only half of those with a DC pot understand what an annuity is quite or very well, and just 20 per cent understand what an enhanced annuity is.

This compares to 90 per cent of people who said they understand what a mortgage is.

Women were consistently less financially aware than men on all measures.

The research also exposes a lack of understanding of the tax implications of the Government’s flagship pension freedoms set to be introduced in April.

Only 20 per cent of people with a DC pot said they understand what a marginal tax rate is.

When pressed on how to reduce their tax burden when withdrawing money from their pension pot, only half gave the correct answer that it should be withdrawn in small amounts over a number of years. Some 10 per cent wrongly thought that the best thing would be to withdraw as one lump sum.

The research also found that 60 per cent of respondents had not made a plan for retirement. Even among those less than one year from retirement, 40 per cent had not made a plan.

In addition, the survey found that 70 per cent of those with a DC pension wanted it to deliver a guaranteed income, while just 7 per cent said that paying for big ticket items such as holidays was a priority.

Three quarters of people across the entire survey agreed with the statement ‘I would prefer a secure guaranteed income over an income that might rise or fall depending on financial markets’.

When asked what proportion of their pension fund they could afford to lose, the most common answer amongst those with DC pots was none, cited by 35 per cent of people. Just 7 per cent thought they could afford to lose 20 per cent of their fund or more.


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. This higlights the dangers of ” guidance ” or decision trees, and reinforces the need to seek advice from a qualified adviser. The problem as always is that those who need the advice perhaps can least afford it, or be willing to pay for it.

    A big job for the ” free guidance ” organisations being coordinated by the Government.

  2. What a statement of the bleeding obvious!

    While I can just about wire a plug I can’t wire a fuse board; I can put petrol in the car but I can’t run an engine diagnostic – which is why I pay an electrician and a mechanic respectively

    …so while most people can write a personal budget, retirement income flexibility is confusing – quelle surprise! That of course is why people should seek independent financial advice…

  3. Over half of consumers do not understand the options available to them on their DVD player, so I don’t know why we would expect them to understand all of the pension rules. That is, after all, what we get paid for.

    As for those that don’t have sufficient funds to need an IFA, the reality pollsters ignore is that they will work it out *when the need to understand arises*. Hopefully. If a pollster asked me how to record something on my DVD player I would have no idea, and would thus contribute to the inevitable “Consumers do not understand DVD players” headline, but if I actually needed to record something I would get the manual and work it out.

    I am not blasé about the risk that consumers may, in ignorance of the rules, withdraw a large lump sum and pay unnecessary tax. But the impression the headline wants to create, of a huge mass of desperate and confused consumers milling about ready to destroy their finances, is misleading.

  4. Oh really? Who would have guessed? What next? The invention of the wheel?. Even when they do have some sort of sketchy idea they get their information from poor and banal reports on the TV such as Dispatches the other evening.

    They have no idea of the cost and tax implications of taking the cash. Little do they realise that they will be enriching the fund management and adviser industry and boosting tax revenues (in the short term) at the cost of self impoverishment in the longer run.

    That no lesser person than Ros Altmann should endorse these new proposals is something I just cannot comprehend – unless she is vying for a gong from Dave.

  5. Rt Hon Sir Arthur Streeb-Greebling 14th January 2015 at 9:51 am

    The best way is to withdraw money over a number of months actually. That’s the way to exploit the interctesties of the tax ststem folks!

  6. @ Simon. It reminded me of Fawlty Towers and the comment about Mastermind ” Specialist subject- The bleeding obvious!”

  7. I understand them however making a recommendation where you don’t have the potential to get sued is a little bit harder to understand. I said it when the new rules came out, that it looks excellent PR spin for the Govt ‘People can do what they want with their pensions’ however it will be the Advisers who yet again are left carrying the can – If it all goes wrong the clients will sue us and the FOS will back them. The FCA and FOS need to provide clear guidance. If you point out risks to clients, and the client is happy to take that risk then there should be no comeback. At the moment the FOS would just say client didn’t understand the risks get your cheque book out adviser. It will also be interesting to see how many Adviser’s insurance companies are willing to take the risk with DB Transfers, and clients being able to spend all their cash from their pensions.

  8. Very interesting. Perhaps we can draw an inference from this information.

    Given that the Citizens Advice Bureau is staffed by volunteers from the general public, if over half don’t understand their own retirement choices and tax issues, I guess that means it will be over half of CAB that won’t know what they are talking about when it comes to giving guidance!

  9. The results of this survey (to my way of thinking anyway) demonstrate, yet again, that:-

    1. the FCA should mandate OM as the default option,

    2. the TSC should demand from the FCA an explanation as to why it hasn’t done so,

    3. all our trade bodies should be pressing for this to happen, not least APFA.

    An almost immediate benefit would be that the pre-retirement packs issued by providers could be slimmed down to a much less intimidating two or three pages and, indeed, their format could be standardised.

  10. We as IFA’s know and accept this as fact ! more importantly so do the un-regulated and fraudsters !!!

    Why is it our regulators do NOT heed our warnings ? do we do it for fun ? do we do it just for the sake of moaning ? do we all have deep rooted grudges ?

    Its all ~~XXing madness, so much has been advertised on the new freedoms come April on pensions, has any-one heard, any advertisements other than the FSCS (which didn’t really tell you much) on the real need to make sure you take regulated advice, the protection it gives.

    IMHO the FCA has missed the boat on this one, and if you think the closed book mess was big, then it will pail into insignificance to this. And Ms Crookes thinks we are all un-ethical !!! its a 150 mile an hour train crash waiting to happen on or around April !

  11. If someone books an appointment to come and see me, whether an existing client (who pays for an ongoing service) or a customer (transactional and we use the dictionary definition of customer and client), then since 2007 we have recorded ALL client meetings as MP3 files so we can clearly show when we have been providing information and explaining options so a consumer can make a choice OR when we have strayed over the line and provided advice (usually chargeable, but only after prior agreement with the consumer, so if we accidentally advise, which is rare, we can’t charge).
    Like many qualified advisers, we are happy to give pro bon of our time INFORMATION, now being called “guidance”, which we may be banned from giving despite being qualified to advise under the new rules!
    We never have charged for providing information, explaining options and then asking of the person would lie us to provide advice (chargeable) or if they now understand enough to go off and make an informed choice.
    NOW we are expected to take money off our paying clients who take advice from us and give it to the Government via MAS for them to employ unqualified “guiders” to explain things to them for them to then book another meeting with us to see them and charge them to advise and implement.
    Is that going round in circles or WHAT?
    I know Julian Stevens keeps banging on about a voucher system, but why should we pay for something we do pro bono?

  12. I can see the guidance coming to a very abrupt halt from CAB rather shortly after April. They simply will not have the man-power (or women-power) to meet the initial demands as well as do what they are there to actually do.

  13. I got into a twitter discussion during Dispatches on Monday about the fact IFAs essentially only deal with the middle class (the inference being that ‘lower classes’ – the tweeters terminology not mine! don’t want free guidance – they want free advice).

    I pointed out that ‘free guidance’ can be found everywhere but advice carries a cost – howver (as Phil outlines above) IFAs will typically offer an initial meeting ‘at their cost’ in order for a client to establish whether there is value in paying for advice.

    IMHO providing the CAB and TPAS clearly signpost the option (and ideally potential importance) of impartial advice then this should work (subject to capacity!) If CAB and TPAS start to tray into advice and there is no clear distinction between information/guidance and advice then it could go horribly wrong.

  14. If the FSA struggled with decision trees for Stakeholder pensions how does the FCA et al expect ‘Guidance’ to be of any use?

  15. I suspect ‘consumers’ will learn very quickly what this all means when the Welfare State is rolled back and ceases to be a life-style underwriter of last resort.

  16. @Frankly

    Quite so. And then watch the FOS get inundated!

  17. To be fair to the FCA, it’s had Osborne’s ill-thought-through Guidance idea dumped on it by its lords and masters at the Treasury and all it can do now is try to work out a coherent way of getting it to work (mainly how to extort the costs of it all from the various entities subject to its regulatory imprimatur). Quite what At Retirement Guidance has to do with deposit talking institutions that don’t provide advice and thus why they should be forced to contribute is anyone’s guess. One may imagine they may have made strong representations to this effect to the FCA but were told just to pipe down and pay up……or else.

    We cannot know what Martin Wheatley really thinks of it all but, as a civil servant, he has little choice but to do as he’s told. There’s always that faint prospect of a knighthood just over horizon, which he wouldn’t want to jeopardise.

  18. George Osborne is entirely responsible for whatever happens from his announcement. He should take the credit for the good things that arise from pensions freedom and carry the can for the bad things. Sadly he will only accept responsibility for half of the outcomes and deny culpability for the other half!

  19. With less than 3 months to go until the new pension rules come into effect we still have no credible idea as to how CAB and TPAS are going to implement the guidance guarantee.

    My personal thoughts are that we will initially see a raft of 65 year olds over the moon over that the nice lady at the CAB or TPAS helped them understand the difference between annuities and drawdown, helped them understand what tax would be paid etc etc. 6 – 12 months after that we will have the same 65 year olds complaining that no one told them about the risks specific to them – inflation and annuities, forgetting to tick the option for a joint annuity, market performance has lowered the value of their drawdown fund etc etc

    What will the press say? “Thousands make pension mistakes and it’s regulated advisers fault”.

    Thats all my humble opinion obviously.

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