More than two fifths (43 per cent) of 50-64 year olds do not know how they are going to access their defined contribution pension, research from the Institute for Fiscal Studies has revealed.
In its latest report, How Important are Defined Contribution Pensions for Financing Retirement?, the IFS revealed the most common response from respondents about how they intend to access their pension pot was "don't know"
Of those who knew how they were going to access their pension, the most popular method was found to be chunks of cash, which was identified by 21 per cent of respondents.
This was ahead of drawdown and an annuity from their own provider (14 per cent) and leaving their pension untouched except for a lump sum (8 per cent).
For many of those currently in their 50s, these are ‘low-stakes’ decisions IFS research economist, Heidi KarjalainenThe IFS also included a more detailed age breakdown in the report, detailing that 45 per cent of 50-54 year olds did not know how they were going to access their pension compared to 39 per cent of 60-64 year olds.
Among 60-64 year olds, accessing their pension via chunks of cash was the most popular method of accessing their pension (24 per cent), ahead of an annuity from their own provider (16 per cent) and drawdown (13 per cent).
The research also found that responses differed between people in different parts of the wealth distribution, with those in the bottom third of wealth being most likely to respond “don’t know” (60 per cent), with middle third next likely and the wealthiest third being the least likely.
Among the wealthiest third of respondents, the most popular method of accessing pension was found to be drawdown whilst, for the middle and bottom third it was chunks of cash.
The results show that even after controlling for a number of other characteristics, "we still see some differences in prevalence of responses by wealth".
Also, even after controlling for differences in total wealth, those with more DC wealth are less likely to say they ‘don’t know’ what they plan to do with their pot, and more likely to respond ‘flexible drawdown’.
The IFS suggested that these findings raise a "key question", especially for policymakers, to understand why respondents answered "don’t know" to these questions.
The report suggested two possible answers to this, either because they are comfortable with their financial situation in retirement and see DC pots as some additional saving pot, or whether they answer this because they feel they are not sufficiently supported by pension providers, the government and others in making these decisions.
Proportion
Elsewhere, the report also discovered that most people accessing their DC pension pots take them out in full, something that was especially true for small DC pots.
However, the report cautioned that this data “does not give us information on the overall circumstances of the individuals”, including other wealths such as defined benefit pensions and financial wealth.
To control for these factors, the report asked people whether they have taken a lump sum out of their DC pension in the past two years and whether the withdrawal represented the full pot available.
It was discovered that average amounts are smaller among those lower down the wealth distribution, but that the opposite is true for amounts relative to overall wealth, with the larger average drawdowns representing a smaller proportion of total wealth at higher points of the wealth distribution.
The report stated that the fact that the full withdrawals represent such a small proportion of people’s overall wealth may indicate that the high prevalence of full withdrawals among those accessing their DC pots for the first time may be down to many of those people having other resources available to them.
However, the report cautioned that it would be possible assess this further by comparing the characteristics of people who have taken out a pension pot in full and those of people who have not.
IFS research economist and author of the report, Heidi Karjalainen, said: ‘It can be difficult for individuals to decide how to access savings in a defined contribution pension, and indeed many of those approaching retirement report that they do not know how they will access their pension pots.
“For many of those currently in their 50s, these are ‘low-stakes’ decisions, as they have significant other retirement resources available to them. But that will change as future generations will rely more heavily on defined contribution pension pots for financing their retirement."
Karjalainen added that developing how best to support people to make good financial decisions when accessing defined contribution schemes is "crucial", so that individuals are protected against adverse outcomes through their retirement.
tom.dunstan@ft.com
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