People are aware of the approaching pension changes but feel confused about how to use them, a Pensions Policy Institute report has found.
The 58-page report, Supporting DC Members with Defaults and Choices up to, into, and through Retirement, published by the PPI, revealed good awareness and general acceptance of the changes announced by the chancellor last March.
The report, based on research involving 33 face-to-face interviews and three focus groups with 22 people aged between 55 and 70, said: “This compared to a continuing poor awareness of other options that were already available to individuals prior to the Budget, such as the trivial commutation of small pots or the ability to access pension savings from age 55 onwards.”
But the study warned that people were confused about how to use the flexibilities effectively. It said: “Participants typically had a poor understanding that taking lump sums could push them into higher marginal tax brackets.”
The report also revealed other possible misconceptions among consumers. It found that those interviewed tended to overestimate what they needed for their essential spending in retirement, and that once people were taken through a budget planning exercise, they typically found they needed £10,000 to £15,000 each year at first.
They also tended to underestimate their life expectancy, particularly when it came to their chances of living to 90 or above.
Those taking part in the research appeared to understand and generally accept the concept of longevity insurance, but a barrier to this could be its costs. It was noted that many involved in the research were open to the idea of paying between £500 and £1,000 each year from the age of 65 to secure a safety net income from the age of 85.
|Points from the report|
|Participants in the research typically had a range of pension investments, including more than one DC pension or a DB pension.|
|Phased or flexible retirement was increasingly seen as normal.|
|Those interviewed tended to overestimate how much they would need for essential spending in retirement.|
|Those aged between 55 and 70 taking part in the research tended to underestimate their life expectancy|
Jamie Smith-Thompson, managing director of Kent-based Portal Financial, said: “Given the risk of making the wrong decision and the amount of confusion in the market, it is clear that getting sound financial advice has never been more important.”