Managing a pot of money and making it potentially last over three decades could seem like a daunting task, but it seems the UK public are welcoming the opportunity to become their own accountants.
With Budget reforms giving pensioners in Defined Contribution (DC) schemes (an individual pension fund which is determined by contributions and investment returns) much more freedom as to how they use their pension pots, it seems that the traditional annuity rates – and guaranteed income - is likely to be shunned in favour of self-management.
According to research from Hymans Robertson only 25% of those currently in DC schemes plan to use most or all of their pension pot to buy an annuity when they retire, with 32% planning to take most of their pot as cash to spend in other ways with just a small amount left over to consider annuity rates.
The survey also revealed that 12% of those questioned would bypass the annuity market altogether and would take their whole pot as cash, while another 31% would also choose not to buy an annuity but would instead like to keep control of their money and draw an income from the pot each year.
But why are people choosing alternatives to the annuity market when it's the only way to guarantee an income for the rest of your life? Well, 34% of those questioned over the age of 51 feel that annuities are not flexible enough for their retirement plans, and a further 38% label annuities as poor value for their savings.
"Given the greater retirement freedom offered by the pension reforms announced in the Budget it is no surprise that the appetite for annuities has diminished," said Richard Eagling, head of pensions at Moneyfacts. "Retirees are understandably keen to explore new options and many will now look to take a more diverse approach to retirement planning rather than simply pinning their hopes on one product. However, annuities should not be dismissed entirely, for some retirees the secure regular income they provide will still be appealing."
There is also growing confidence among consumers when it comes to managing their own pension pots with 61% agreeing they are confident about self-managing their savings throughout their retirement, compared to just 19% who aren't - although there is still a large call for more independent advice.
In another study carried out by PwC it has been revealed there is a potential advice "black hole" brewing, with a wide demand for advice from Independent Financial Advisers (IFAs) on retirement options but many people, particularly those with small pension pots, may not be able to justify the high fees.
Of those aged 53 – 75 over two thirds (63%) have, or intend to, pay for advice from an IFA to obtain help on how to access their pension pot. However, half of these have pots of only £40,000 or less, questioning the affordability of the advice and whether customers are getting value for money.
Nonetheless, the increased flexibility – not to mention HMRC's announcement that pensioners who have backtracked on their decision to buy an annuity will not be hit by tax charges, as well as the extension of the "cooling off" period to allow consumers to change their minds if needs be – has been welcomed, but it highlights the need for increased flexibility in the annuities market as a whole.
This is particularly the case given that PwC research also revealed that securing a guaranteed income continues to be a key factor when retirees are deciding how to manage their pension pot: "People still want to invest a small part of their pension pot in an annuity, but it's crucial that insurers offer innovative new products to satisfy their customer demands and to fill the hole left by up to a 75% fall in annuity sales," said Jonathan Howe of PwC.
Getting the right advice remains vital, and that applies whether you choose to self-manage your pension savings or want the security of good annuity rates. Contacting an IFA, or even using our annuity service to see if it's a viable option, can ensure you make your pension pot go further while taking advantage of the increased flexibility the reforms are offering.
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