Nearly 70 per cent of all those with defined contribution pensions would prefer a secure guaranteed income over an income that may rise or fall depending on financial markets, a new survey found.
A study by the International Longevity Centre - UK, who surveyed 5,000 people aged 55-70 who are yet to retire or draw on their private pension wealth, found that people still favour a guaranteed income.
Just seven per cent said that paying for ‘big ticket’ items such as holidays or a car was most important, and 5 per cent said paying off debt was the priority.
But while consumers want income security, many are confused about options. Only half those with a DC pension said they understood what an annuity is quite or very well, a figure which falls to 20 per cent for enhanced annuities.
Just 35 per cent said they understood what income drawdown was, compared to 9 out of 10 people who said they understood what a mortgage was.
Compounding the problem of confusion, across the entire survey just four in ten had yet to make a plan. Those closer to retirement were more likely to have started planning, but even amongst those who were less than one year from retirement, more than four in ten had still not made one.
The survey also showed that only one in five people with a DC pot said they understood what marginal tax rate was.
When pressed on how to reduce their tax burden when withdrawing money from the pension pot, only half gave the correct answer that you should withdraw it in small amounts over several years, while 10 per cent thought that the best thing would be to withdraw as one big lump sum.
The work was supported by industry partners EY, Just Retirement, Key Retirement, LV and Partnership and guided by pensions expert Ros Altmann.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “These findings are consistent with other research we have seen recently; investors welcome the new flexibilities and freedoms but they value security of income very highly too.
“For most investors a blended retirement income; part income drawdown from an invested fund and part annuity is likely to be the best answer.
The research also highlights the importance of taking the time to explore what products are available and making an informed choice.
“The new government Pension Wise service will help but it is also important to shop around on the open market, something which was also highlighted in a recent FCA report.”
peter.walker@ft.com
