16th March 2015
Around a third of people expecting to finish work and retire this year are actually unaware of the new pension freedoms they will have at their disposal.
According to research Prudential almost one in three, or 32%, have no idea the about the massive changes happening in the retirement industry whereby from 6 April, savers will be able to do as they please with their nest-egg and they will no longer be ultimately forced to buy an annuity.
The insurer’s eighth annual ‘Class of’ study, which tracks the financial plans and aspirations of people who plan to retire this year, shows that substantial numbers of the ‘Class of 2015’ are in the dark about the changes to pensions regulation announced in the 2014 Budget. The pension reforms, which are now just days away from being implemented, will increase the choice of options for people seeking an income from their pension savings.
Retirees changing plans
The analysis found that 2015 retirees who are actually aware that a broader range of retirement income options will be available to them from April, are already taking action. A third, or 33%, of those with pension schemes have already changed or will change their plans for taking retirement income, while one in twelve, or 8% are still making up their minds whether to change their plans or not.
Final salary pensions
Of those people with pension savings planning to retire in 2015, more than half, at 56%, are members of final salary pension schemes, and the majority of these scheme members, at 66%, will stick with their current plan to start taking their pension this year. A further 13 are either undecided or are waiting to take professional advice before making a decision.
For those with pension savings who won’t be receiving retirement income from a final salary scheme when they retire in 2015, drawdown arrangements – where retirees stay invested and draw an income from their pot – are a popular choice.
Overall, their plans include a wide range of options from taking a tax-free lump sum and using the rest to invest in drawdown to have total flexibility over taking the income, while others are likely to buy a lifetime annuity after taking the tax-free lump sum to have a guaranteed maximum amount of income. Some say they will opt for a combination of annuity and drawdown products by investing in other retirement income solutions with an element of guarantee and income flexibility.
Changes to rules driving demand for professional advice
Around one in three, at 32%, of this year’s retirees with pension savings said that they are more likely to consult a professional financial adviser about their retirement income plans following the introduction of the new rules on 6 April.
This year’s retirees last consulted a financial adviser more than three years ago, on average. A third, at 33%, of the ‘Class of 2015’ have never taken professional financial advice, 23% have done so in the past year including 14% who have done so in the last six months.
Retirees feel more optimistic
The insurer’s study also found that many of the ‘Class of 2015’ are optimistic about the pension reforms with 33% of those with pension savings claiming they are feeling more positive about retirement because of the changes due in April. Thankfully the positive feelings aren’t driven by a widespread plan by retirees to blow their whole retirement pot in one go – only 2% plan to take their entire pension as a single lump sum and spend the lot.
Vince Smith-Hughes, retirement expert at Prudential, said: “The financial decisions made at retirement can be some of the biggest decisions that people make in their whole lives. With this in mind it’s welcoming that the members of the ‘Class of 2015’ are not planning to blow their entire pension savings en masse. The upcoming freedoms mark the start of a process not its end and we’d encourage everyone approaching retirement to take the time to get all the help they need rather than rush headlong into immediately cashing in their fund.”
Smith-Hughes highlighted that retirement can easily last 20 years or longer, so it’s important to make “retirement income decisions that address the risk of outliving your savings”.
He said: “If retirees choose to draw income directly from their pension fund, whether in one big lump sum or over time, it’s important they are aware of the implications on their future income and their tax liability.
“While all retirees should make the most of the free guidance available from the Government’s Pension Wise scheme, a consultation with a professional financial adviser or retirement specialist will also help many people to make the most of the new choices.”