The UK retirement system has shifted over the past couple of decades, seeing DC (defined contribution) saving displace DB (defined benefit) arrangements as the prominent retirement provision for most UK savers. A driving force behind that change was the introduction of automatic enrolment, which (aside from the state pension) has seen millions of people saving for retirement for the first time. The system is designed to harness the power of inertia. However, our research uncovers some challenges as people approach retirement, when they are forced to awake from their saving slumber and asked to engage in making active choices.
The advice gap
Nearly half of the UK population approaching retirement have never received advice.
In the UK, DC savers now have more choice than ever before when it comes to accessing their retirement savings. Surprisingly, nearly half of those savers (47%) take no advice whatsoever when making that decision. When this is considered alongside the fact that 39% of the population say that they don’t understand the options available to them at retirement, the possibility of maximising their retirement income with such limited knowledge becomes incredibly slender.
Even when people seek advice, it does not always live up to expectations. Most respondents say they would expect to receive advice from financial advisers (48%), their pension provider (39%) or government websites (47%). However, when asked where they had received the most useful advice, 13% of respondents aged 55+ said financial advisers and only 9% mentioned their pension provider.
Traditional ‘retirement’ is over
Retirement is becoming a transition rather than a one-off
Insufficient support as well as added choice and complexity is now a theme across the countries surveyed. The cliff-edge retirement is now a thing of the past, with respondents expecting retirement to happen as a staged process. In the UK, 44% of respondents expected retirement to be an event with several stages, and only 20% of over 55-year-olds expected it to be a one-off event.
Most respondents (47%) expect to retire between the age of 65 and 69, although we know that many DC savers are not saving enough to be able to maintain a moderate lifestyle in retirement. It is noteworthy that of the three countries surveyed, the UK had the smallest proportion of people expecting to defer retirement beyond age 70 – savers may yet need to adjust their expectations with respect to either retirement age or lifestyle.
Lifestyle realities and fears
Most people expect their spending to decrease slightly during retirement. Affording the desired lifestyle, day-to-day living costs and accommodation are biggest concerns.
The biggest concern (52%) in retirement is having a limited lifestyle – not being able to live the lifestyle that the participant desires. Further supporting this are the 41% of respondents concerned about being able to afford day-to-day living costs and 36% of respondents concerned about being able to afford accommodation. The combination of these data points shows a concerning trend that people are either consciously or unconsciously aware that their savings may be insufficient.
Control and flexibility: key retirement saving needs
Control and guidance are the most important considerations when deciding what savers are looking for in a retirement solution.
When considering how they would like to manage their money, nearly two-thirds (64%) of all respondents state that it is important for them to be able to do so online. 17% of those state that the importance they place on online access has increased in response to the COVID-19 pandemic.
Alongside managing their money online, 38% of respondents state that they prefer to manage their finances with some assistance – 35% of respondents say that they would happily go it alone, meaning that roughly 73% of respondents are ultimately intending to dictate how, when and where they personally access their retirement savings.
When it comes to taking an income, 26% are intending to receive a guaranteed income, 17% want to receive a flexible income and 15% want to take a single lump sum and leave the rest invested. Perhaps unsurprisingly in the context of our advice findings, 25% of respondents don’t know how they would want to access their retirement savings.
Given the range of responses, including the lack of clarity, it’s clear that choice and support are essential for helping meet retirees’ varied needs and circumstances.
When it comes to selecting a retirement product, clear, simple communications (46%), online access to check their balance (42%) and guidance around how much income could be withdrawn without the risk of running out of money (34%) are the key factors in determining where their money would be placed. These are high numbers when considering that many providers do not offer any of these options, let alone all three.
A key challenge faced by savers in defined contribution systems all over the world is converting a savings balance into income during retirement. As mentioned earlier, retirement is seen as something that has several stages, so another key consideration for respondents was flexibility, in particular the ability to change their income in line with their changing needs (32%).