This report calls on the Government to improve access to and quality of pensions advice and guidance to reduce the risk of financial harm caused by under-saving as well as sub-optimal decisions made at the point of decumulating a pension pot.
Although auto-enrolment has increased the rates of pensions participation, people remain far from being able to achieve their desired standard of later life living. We estimate that average pension pot under-provision stands at 58%, or £240,000. This amounts to a total under-provision of about £130bn per year among those reaching age 65.
Given that pensions are set to become more complex – due to the shift from defined benefit (DB) to defined contribution (DC) – and risks serious financial harm, our report has concluded with a set of policy recommendations for increasing use of advice and guidance to deliver better retirement outcomes for more people.
SMF’s Recommendations
- The Government needs to invest significant resource into a nationwide pensions awareness campaign about pensions.
- Pension Wise needs to be expanded, with a broader scope and new digital tools, including through clear visualisation tools that show potential impact of different options on their financial position in retirement.
- The FCA should provide clearer information on its definitions of “guidance” and “advice” – any review of definitions should involve extensive stakeholder engagement.
- Using guidance or advice should be made the default, given the complexity of decision-making at the point of accessing a pension pot.
Annuity income estimates based on an online pensions calculator for an individual with no underlying health conditions. Actual annuity income will depend on a wide range of factors including health, inclusion of beneficiaries and annuity provider. Drawdown estimates assume 2% annual pension pot returns in the pessimistic scenario, 4% returns in the moderate scenario and 6% in the optimistic scenario. The information provided by the online tool do not constitute financial advice about what to do with your pension – it is intended to provide illustrative insights into the likely challenges and trade-offs faced when reaching retirement.
