Defaults at-retirement.

advice

By Jonathan Watts-Lay, Director, WEALTH at work

The Work and Pensions Committee has recently recommended that every pension provider which offers drawdown should be required to offer a default decumulation pathway by April 2019. I find this idea worrying for a number of reasons.

Firstly, although supporters of decumulation defaults see it as a means to a better outcome, history tells us otherwise.  Before Freedom and Choice many retirees purchased an annuity from their existing pension provider, in essence the default position, albeit the majority could have received better rates elsewhere. With default decumulation, we are effectively discouraging shopping around which means the winners are the providers putting the default solutions in place and probably not the member.

The effects of this could be extremely costly. For example, if a member doesn’t respond to the ‘wake-up’ pack and is defaulted, there may be a number of consequences such as triggering the Money Purchase Annual Allowance or affecting means tested benefits.

In addition, as many people will have more than one pension pot, if they all default based on individual pots rather than the collective value, the likely outcome for many will be sub-optimal and actually reduce income. Partly because many will end up paying more tax than is necessary or because they haven’t considered their changing income needs throughout retirement. In reality, I don’t believe anyone can be defaulted at retirement without some type of guidance and a proactive decision being made.

Secondly, I believe there are issues around the belief that ‘product innovation’ will solve all retirement income needs; rather than thinking about a broader service model which allows individuals to understand their options before they commit.

In reality income drawdown isn’t a product at all. It’s a strategy for withdrawing retirement savings from a tax wrapper, ideally with other lifetime savings and financial options in mind.

And so, I believe that this is not primarily a ‘product’ issue but a guidance issue, where the answer is providing support before any product is sold or indeed defaulted.

The solution is to get employees and members taking advantage of support services that already exist, in particular professional financial education and guidance and for some, regulated advice.

Although Pension Wise take up is relatively low, the user satisfaction is high and a more confident, knowledgeable individual is the result. Members who access financial education programmes and workplace financial guidance services are equally satisfied.  Our experience is that they too emerge more confident, knowledgeable and more able to make informed decisions; it has been no surprise to see significant numbers of members changing their retirement plans, increasing pension contributions and seeking out regulated advice as a result.

So before more defaults are created, let’s have more effort to make financial education and guidance the norm.

In summary, we should be talking about ‘guidance pathways’ not ‘default pathways!

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