By 2050 fewer savers will have access to a defined benefit scheme and solutions are needed to help them from frittering away their retirement cash, Aviva has warned.
Maiyuresh Rajah, head of investment strategy and propositions at Aviva, said over eight years on from pension freedoms, 60 per cent of current retirees were choosing to access their savings via drawdown.
He told Emma Douglas, chair of the Pensions and Lifetime Savings Association (PLSA) only 13 per cent were choosing to buy an annuity, with a cash lump sum preferred by the remaining retirees.
Rajah, who was addressing delegates at the PLSA’s annual conference in Manchester, said the average drawdown amounted to £55,000.
He said: “Withdrawal rates are very high, 8 per cent [of their fund] or more, and as much as 16 per cent.”
Rajah added there was evidence the cash was being used to top up retirement income from a defined benefit scheme.
Douglas said: “This seems to be very much a can’t take it with you mentality, to top up a DB [scheme].”
He dubbed the next generation of pension savers ‘Generation DC', who by 2050 will be solely relying on a defined contribution scheme to fund their retirement.
Aviva estimated the average pension pot will then be about £225,000, based on current estimates.
Rajah said this seemed like a generous sum but would not “amount to a life of luxury”.
He pointed out it would fall short of the PLSA’s living standards requirement of £23,000 for a ‘moderate’ standard of living.
“More than half of people have no idea how to manage a pot of that size. Only a few can plan beyond 10 years. So that pot has to be used for an undefined amount of years.”
Pension savers face ‘disaster’
Another fear was that one in 10 savers were likely to opt for cash lump sum which - on average estimates - would incur a tax bill with the potential to wipe out about 10 years of contribution.
Rajah added: “People are making poor decisions that could lead to disastrous outcomes.”
He said Aviva’s guided retirement solutions had been developed with the aim of giving people the ability to manage their retirement.
The solution splits retirement into two different phases and uses a ‘three pot’ model, which splits savings into a flexible income pot for early part of retirement, a guaranteed income pot from an annuity and an occasional spending pot to dip in for unplanned spending.
“We will help people make appropriate decisions on pot splits, so how much they should allocate to each pot.
“We don’t want people putting too little into guarantee because it’s too far away and we will provide suggested withdrawal rates, and we will also provide lots of tools and lots of modelling, and show the impact of different dates - when they annuitise for example."
Rajah told delegates Aviva’s tool will at some point bring in other pension pots as well as model the impact of the state pension which was especially important to low and medium earners.
“We also want to give the right tools to those wanting to work part time and draw on their pension manage their money effectively and 'live long and prosper'.”
Samantha Downes is a freelance financial reporter.
