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their tax burden when withdrawing money from their pension pot, only half gave the correct answer that it should be withdrawn in small amounts over a number of years.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.