About one in 10 people coming up for retirement could be about to make major financial blunders that lose them up to a fifth of the money they could have in old age, a new study has warned.
That's the calamitous scenario suggested by findings that lay bare the difference between a 'good decision' and a 'bad decision' when you reach state retirement age.
Nearly 700,000 people - around 12 per cent of Britons currently aged 50-65 - are in this 'high risk' group because the choices they face are so complicated, according to research from the Pensions Policy Institute.
It found that judging what best to do with cash in 'defined contribution' or money purchase schemes - those that make workers responsible for all the investment risk - is the most difficult of all pension and retirement decisions.
Ideally you need to know how the economy works, the risks of financial markets, average life expectancy, the effects of inflation, and some basic arithmetic.
Numeracy skills in particular are linked to the ability to understand pension arrangements, according to the PPI.
It said the options become even more complicated from next April under the Government's pension freedom reforms, which will give people much greater power over how they spend, save or invest their retirement funds.
Fidelity Worldwide Investment, which sponsored the PPI report How complex are the decisions that pension savers need to make at retirement?, called on the retirement industry to create a 'safety net' to ensure people make reasonable decisions.
Alan Higham, retirement director at Fidelity, says it already carries out 'basic sense checks'when dealing with pension customers.
The company asks if someone is in ill health in case they qualify for more generous enhanced payouts. And if someone married is buying an annuity that guarantees an income for life, it checks if they want a spouse provided for after they die under a joint life rather than single life product.
Higham says: 'There is a lot of expertise in the financial services industry. We understand this even though our customers don't. So it's wrong to sit back and watch customers making decisions that on the face of it could be wrong without saying: "Are you sure you want to do that?"'
'For example, a married man who buys a single life annuity. It's easy to do that by mistake. You would be surprised by how many take that decision.'
He adds: 'We don't question the decision they're making or make them justify it. We just make sure they know what they are doing.'
Higham says that when customers make bad decisions the pension industry often profits, which reduces the incentive for companies to help their customers.
But he urges: 'We believe it is incumbent on the whole industry to use its expertise to help consumers make good decisions and not allow their customers to sleepwalk into bad decisions.'
Who is most at risk of making poor decisions?
The PPI has identified a group of 694,000 people who are the most likely to make blunders about their finances when they reach retirement.
People in this group have pension pots of £19,400-51,300 in 'defined contribution' or money purchase schemes - which make savers responsible for all the investment risk - and none in far more generous final salary schemes where employers guarantee your income in retirement.
This 'high-risk' group makes up 12 per cent of the 5.5million Britons currently aged 50-65 who face big and difficult decisions under the Government's pension freedom reforms from April next year.
They hold more than £20billion of retirement savings between them, but Fidelity says that the difference between a good and bad decision could cost around 20 per cent - £4billion in total - of this over a person's life.
Its 20 per cent estimate is based on internal monitoring of the 'uplift' given to its customers as a result of efforts to get them the best deal possible.
Just how difficult is making a decision about your pension?
The PPI study contends that making an informed choice about savings in a 'defined contribution' scheme is the hardest of all pension and retirement decisions - more so than accessing final salary or state pensions, or other things like buying a home.
It set up an experts' workshop on the behaviour and psychology of making pension and other financial decisions and ranked them in order of both complexity and importance. It also looked at the knowledge and skills that people need in order to make informed decisions.
The PPI notes that what was traditionally a single event - leaving work and taking a pension - has for many people become more staged and gradual as people work longer and often more flexibly, and opportunities for taking pensions in stages have become more readily available.
The launch of 'auto-enrolment' of workers into pensions in 2012 means many more people are being brought into pension saving, particularly into private sector 'defined contribution' pension schemes.
Meanwhile, the introduction of pension freedom reforms means more people mighy keep their savings in income drawdown schemes after retirement, prolonging the need to make decisions about potentially risky investments well into their old age.
'The 56 per cent reduction in annuity purchases observed in the third quarter of 2014 in comparison to the third quarter of 2013 indicates that far fewer annuities will be purchased by people with defined contribution savings in future, and that their funds may therefore be exposed to these greater levels of risk,' says the PPI.
It says that decisions are likely to be very difficult for people to make without assistance, but financial advice has an upfront cost attached that might make it appear inaccessible to people with small amounts of savings.
The report notes that the sale of non-advised products often have a commission attached and therefore come at a cost too.
However, it says that use of financial advice is very low on average among all types of people reaching retirement,ranging from 4 to 14 per cent.
The PPI says the Government's free guidance sessions on its freedom reforms will be needed to fill the gaps in advice and information.
'For those who do engage with the guidance, they may need ongoing support, not just around decisions at retirement, but decisions later on in retirement as income needs or sources might change for people several times during retirement because of changes of health, household makeup, and increases or decreases in available income,' it says.
'It is not yet clear whether people will be only allowed to use the guidance service once, in the lead up to retirement, or will be allowed to have multiple sessions.'
The PPI suggested people might benefit from several targeted guidance sessions throughout retirement, and it might also be worth investigating whether to offer help to people of working age still making decisions about saving in a pension.
City regulator the Financial Conduct Authority this week published rules for the bodies responsible for delivering the new pensions guidance - Citizens Advice will offer face-to-face sessions, while the Pensions Advisory Service will help people over the phone.
The FCA covered areas like ensuring consistent service and how complaints are dealt with - and it also promised to be on the alert for any scams that spring up around the new freedom reforms.
However, the Treasury is responsible for deciding some of the practical issues which remain unclear, such as whether there will be age or other restrictions on who seeks help, and whether there will be limits on the length or number of sessions people are allowed.
The PPI's report on the complexity of pension decisions is the first in a series looking at retirement income.
The first was sponsored by Fidelity Worldwide Investment, but the series as whole is supported by a consortium including Age UK, the Investment Management Association, Partnership, the Pensions Advisory Service and the Pensions Regulator.
Sam: 11th Dec 2014 15:16:00
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