What makes for a good retirement? This question is more important than ever given the freedom and choice reforms, and the new options for those with defined contribution pension savings.
Underpinning these changes is a profound intellectual shift in UK pensions policy: the Government should be neutral as to what people do with their pension savings, and pensions policy should not be biased toward people receiving a guaranteed income in retirement.
We know from international experience of ‘voluntary annuitisation’ systems that few individuals opt for a guaranteed income over cash. If this eventually becomes the norm in the UK after freedom and choice – and there is no logical reason to think it wil not – what will be the consequences for people’s retirements?
To answer this question, the Strategic Society Centre recently undertook statistical analysis of retirees with a private pension income in the ‘English Longitudinal Study of Ageing’ household panel survey. This explores the associations between level of secure income, level of non-housing wealth, and people’s wellbeing and experience of retirement.
Regardless of the level of someone’s financial wealth, we found that level of guaranteed income is significantly associated with various aspects of wellbeing and leisure. These include going to the cinema, reading a daily newspaper, taking a holiday, participation in community groups and other civic activities. Income is also associated with how people feel about their life, and whether they report “the conditions of my life are excellent” and “I have got the important things I want in life”.
The research suggests an average DC pension saver would be likely to have a better retirement if they seek to maximise their level of guaranteed income. Although retaining DC pension wealth as savings or investments may provide some level of compensatory wellbeing, the total effect of guaranteed income is stronger than wealth in many of the domains identified in the research.
In addition, if an individual with DC pension savings cashes in such savings and proceeds to spend down this wealth, the wellbeing effect resulting from this wealth will decline commensurately. In contrast, the positive influence on retirement resulting from higher levels of guaranteed income is constant and lasts for the entirety of someone’s retirement.
Overall, the findings suggest that if private pension incomes across the older population decline following the freedom and choice changes, this will likely lead to a reduction in levels of wellbeing among the older population.
To prevent this happening, the Strategic Society Centre has put forward a set of policy recommendations building on the research:
- Actively promote receipt of a guaranteed income in pension policy to improve the wellbeing of retirees
- Educate savers about the role of a guaranteed income in a good retirement
- Include information about the importance of a guaranteed income for wellbeing in retirement in guidance and information from Pension Wise
- Ensure receipt of a decent, guaranteed retirement income is the default option for DC pension savers
- Undertake regular research into the effect of the April 2015 changes on older people’s wellbeing
James Lloyd is director of the Strategic Society Centre
You can download a copy of Income, Security and Wellbeing here.