A stark warning has been given by a leading UK pensions expert – the current pensions system is not fit for purpose, and at a time when retirement prospects are increasingly uncertain and state pensions are being cut, consumers face significant risk of a retirement shortfall.
In her "Pensions – Time for change" report, Dr Ros Altmann highlights the problem of inadequate pensions as most defined contribution schemes don't guarantee future income. Poor value annuities have come under the spotlight as well, with those that don't increase with inflation potentially exposing millions of pension savers to later life poverty.
An astonishing 60% of pension savers don't fully understand the risks of investing in defined contribution pensions, and that figure rises to 75% for those in the 18-24 age group – a key demographic for auto-enrolment – whilst a worrying two thirds of people are expected to not achieve their target retirement income.
Auto-enrolment itself, despite being designed to help ensure more people prepare for their retirement, may not be adequate, said Dr. Altmann. The report states that standard "default" options of most auto-enrolment schemes are not fit for purpose – as people face later retirement dates and a phasing out of work rather than a specific retirement event, a one-size-fits-all approach is no longer suitable.
The report argues that the current system is too inflexible and that many people will not, or should not, buy a standard annuity, with savers, pension providers and financial advisers alike being urged to consider alternative investment and retirement income solutions.
Dr Altmann wrote: "As retirement becomes a process rather than an event the need for different options for both investment and income streams is growing. Planning flexibly is ever more important and it will also be necessary to find approaches which offer better later life income prospects than can be provided by standard annuities.
"Defined contribution pensions are not fit for 21st century lives. New thinking on both pensions and retirement is urgently required and those who want the best chance of better incomes will need to plan carefully for the future."
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