Defined Contribution  

How savers are using pension freedoms

How savers are using pension freedoms

Around 90 per cent of defined contribution (DC) pots withdrawn since the introduction of pension freedoms were worth less than £30,000, research from the Pensions Policy Institute (PPI) has revealed.

The institute used data from the latest English Longitudinal Study of Ageing (ELSA) and concluded that bigger pension pots are being used to buy income products.

However, full withdrawal has become the most popular means of accessing defined contribution pension savings, accounting for more than 50 per cent of pots accessed.

Article continues after advert

Drawdown products have also become more popular, accounting for 30 per cent of retirement product purchases.

Annuities, which accounted for 90 per cent of retirement products bought with pension pots in 2013, now only account for around 12 per cent of pots accessed, the PPI's report showed.

Nevertheless, this retirement product is more than twice as popular among those in older age groups compared to those in younger groups, accounting for around 20 per cent of retirement product purchases for those aged over 65, compared to 6 to 8 per cent for those aged under 64.

Implemented in 2015, pension freedoms gave savers with defined contribution pensions the option to withdraw their funds from age 55.

The PPI's research also showed that half of people currently aged between 50 and state pension age will have £9,500 or less in defined contribution savings by the time they reach their retirement age.

However, around 80 per cent of this group will have a defined benefit (DB) entitlement.

The other half of individuals in this age group will have defined contribution pots of more than £9,500, and less than a quarter of this half will have a defined benefit entitlement.

The PPI warned, however, that in the next five to 10 years, there may be an increase in the number of people reaching retirement with both low levels of defined benefit entitlement and low levels of defined contribution savings, as those who have been automatically enrolled later in their working lives reach retirement.

According to Lauren Wilkinson, policy researcher at the PPI, pension freedoms has opened new ways for individuals to access their savings, but also opened up new challenges and risks.

She said: "Future retirees will be reaching retirement with more different combinations of saving which will impact the decisions they make and the retirement outcomes they are able to achieve.

"Over time there will be an increase in the number of people reaching retirement at risk of making sub-optimal decisions that could have a significant negative impact on their retirement outcomes because of the complexity of savings portfolios, the risk attached to certain types of savings (such as DC savings) and low levels of understanding and engagement.

"Many people have not given much consideration to how they will access their pension savings in order to fund retirement, even among those who intend to retire within the next few years."

Rob Yuille, head of retirement policy at the Association of British Insurers (ABI), one of the sponsors of the report, argued that the pensions sector is doing a lot of work to help customers understand their retirement options and make the right decisions for their personal circumstances in the light of the pension flexibilities.