In the 2014 Budget the Chancellor gave people more freedom in how they access their pension funds at retirement. Since the pension freedoms came into full effect in 2015, individuals have been able to withdraw their savings at the point of retirement as they wish, subject to their marginal rate of income tax. Savers in DC schemes are no longer directed towards an annuity, they may access their pot as a lump sum, buy a product that pays an income, keep it invested – or a combination of all three.
These new freedoms offer savers more flexibility and choice, but also more risks to consider. Far fewer people now buy an annuity and far more seem interested in income drawdown. Many have chosen to take cash. There is still much work to do in order to ensure that people manage to negotiate the path from accumulation to decumulation successfully. People say that they want a regular income in retirement but getting there from a DC pot now involves a more difficult choice than getting the right annuity. People now need to pick the right type of product and then get the right products for them. They need to manage risks, like the risk of exhausting their capital, did not exist in a world of near-compulsory annuity purchase.
The PLSA feels that there is much to learn from the use of behavioural economic based techniques in the accumulation phase. More can be done to make the line of least resistance at retirement the right thing most of the time for most people. The industry will also need to step up and make sure that the high-quality retirement products people expect will be available as those depending only on DC savings begin to retire en masse.