According to the findings, published today (19 November), almost one in five lower income earners with drawdown pensions said they have not enjoyed life over the past week. This compares to 9 per cent of those in the same income group who bought an annuity.
These individuals were also more likely to say that they had felt ‘sad’ for much of the past week (22 per cent), compared to retirees who knew exactly what income they would get month-to-month (15 per cent).
For pensioners on more modest incomes, 13 per cent in drawdown said they never felt free to plan for the future, compared to 5 per cent of those with an annuity.
The research, commissioned by Legal & General (L&G) and published in its report Retirement Income Riddle: New perspectives on how we make financial choices and their impact on our wellbeing, explored the emotional impact of retirement decision-making.
The report suggests up to 50,000 pensioners on lower incomes who chose drawdown prior to the pension freedom reforms in 2015 are now finding life more difficult than those with an annuity.
It also notes since the 2015 pension reforms a mere 187,000 people have taken out an annuity, which provides a guaranteed income for life, compared to more than 436,000 drawdown customers.
The research had analysed 1,843 respondents in Wave 7 of of the English Longitudinal Survey of Ageing who had indicated they had an annuity or a drawdown product during 2014 to 2015.
Emma Byron, managing director of retail retirement income at L&G, said the findings did not suggest annuities made people happier but highlighted a one-size-fits-all approach was 'yesterday’s solution to yesterday’s problem'.
She said: "Our research with Demos shows that in the face of more choice, consumers need better guidance and support to understand how the financial decisions they make can affect their retirement journey.
"Pension Freedoms is still settling into the retirement landscape, but it is clear that thousands of consumers are potentially choosing or defaulting into options which could be damaging not just for their financial circumstances, but for their health and wellbeing too.
"It is worrying just how many people say they are unhappy – as an industry, we need to bring back the emotions often left out of financial services conversations, because it is our job to help them understand what the implications are of each of the products."
Michelle Cracknell, chief executive at The Pensions Advisory Service, said the findings pointed to a future conundrum that could impact advisers.
She said: "When you think about the majority of drawdown cases, advisers will be charging a percentage of funds under management.
"But at the time when people need the most help their fund has shrunk to a smaller size, so the actual income for the adviser will be smaller."
She also pointed out that while the analysis focused on decisions made before the pension freedom reforms, visible emerging issues could be seen.
She said: "The starting point for many people is that annuities are bad, and this is very heavily embedded in customer psyches at the moment, and means they are not walking into the six retirement options with an open mind.
"Ultimately, the report is about trying to make sure we are prepared for the future – not just looking at what's happened in the past.
"In order to know how best to guide their retirement decisions, people should be encouraged to focus on the concept of retirement, not just the numbers."
Age UK meanwhile has found people who felt in control of their finances were happier than others.
The charity found the majority of over 65s surveyed felt in control of their day-to-day finances, but 17 per cent were just getting by or finding it difficult to manage their weekly income, rising to 23 per cent for single over 65s.
About 14 per cent of the over 65s surveyed said they were more worried about their financial situation now than this time last year, with one in 12 saying they would find it difficult to pay for an unexpected bill of £200 or to replace an essential item such as a washing machine or cooker.
Caroline Abrahams, charity director at Age UK, said: "Being in control of your finances, regardless of how much money you have, is clearly a key component of good mental health and can make a big difference to how we feel about life generally.
"At Age UK we believe that each and every older person should have enough money to live without having to struggle and participate fully in society. Without that it’s easy to see how people can feel unhappy, anxious and less connected to the outside world."
Alan Chan, director at IFS Wealth & Pensions, said: "There is a correlation between financial control and mental well-being. Most individuals yearn for financial freedom by the time they retire which gives them that peace of mind knowing they do not have to worry about money. If they’re worrying about money every day and struggling to get food on the table, it’s going to have an adverse impact on their mental state.
"A large part of an adviser’s role is help clients take greater control of their finances so that they can get on with living instead of worrying. So regular contact and reviews with their adviser to keep updated will help reassure them that they are on top of their finances."
victoria.ticha@ft.com, aamina@zafar@ft.com
