We have now passed the one-year anniversary of the introduction of the pension freedoms. These reforms marked a fundamental shift in the way that people can access their pensions.
People now have more choice, meaning they can more closely align their retirement income with their specific circumstances. However, this additional choice is not without risk, as many of the decisions people make will require them to consider a number of complex variables.
To mark the first birthday of the reforms the Institute and Faculty of Actuaries (IFoA) polled 1,000 over-55s to assess:
- Awareness of the reforms
- Why people are choosing to make use of the freedoms
- Whether people are comfortable making decisions about their retirement income; and
- How confident they are that their pension will last for the rest of their life.
The good news is that awareness of the reforms is high, as is confidence around decision-making. However worryingly, only a fifth of the respondents felt their pension income would be enough to last a lifetime and almost half of the respondents admitted they did not understand the difference between guidance and advice.
We found differences in perception based on a person’s age, gender and social status. Those earlier in their retirement were more uncertain about whether their pension would last a lifetime. Females lacked confidence compared to men when making financial decisions and were less likely to understand the difference between guidance and advice. The same differences were found between those identified as working class compared to middle class. Differences in attitude and action between age groups, genders and social statuses suggest that targeting each segment of the population separately could be more effective than a ‘one-size-fits-all’ approach to improving understanding of the difference between guidance and advice, and to building confidence in decision-making.
One of the most crucial considerations under the new freedoms is longevity risk – the risk of living longer than expected, in particular living to very advanced ages and having depleted assets. If a person underestimates how long they are going to live, and plans their retirement income accordingly, without any guaranteed income, they are likely to run out of savings before they die. It is therefore important that people understand the potential range of ages they might live to. Only 4% of our respondents felt the decisions they had made regarding their pension, since the introduction of the freedoms, have increased the likelihood that their pension will last for the duration of their retirement.
The IFoA is the UK chartered, not-for-profit, professional body for actuaries with over 28,000 members. As a chartered body, the IFoA serves the public interest, with its members providing rigorous, independent analysis. We look forward to debating these issues at the ILC’s Retirement Income Summit as we believe it is vital that the pensions framework promotes adequacy of retirement income for the duration of a persons lifetime.
Click here for a full copy of the report.
Policy Analyst, Institute and Faculty of Actuaries (IFoA)