Low earners could be left behind in retirement following pensions shake-up

Unlocking pension pots will help many retirees, but only if they have money in the first place and know how to make it work for them, says Claire Turner.

The pension reforms announced in last year’s Budget will be implemented in April. They will allow people to cash in all or part of their Defined Contribution (DC) pension when they retire, rather than buy an annuity that guarantees an income for life. Further relaxation of the pension rules were announced by George Osborne at the weekend, ahead of tomorrow's Budget, which will allow up to five million existing pensioners to swap their annuity for a lump sum.

The reforms will help retirees use their money in the best way for them. Hand-in-hand with these freedoms comes increased responsibility on individuals to get good-value financial products that provide a secure lifetime income. But what do we know about financial decision-making among those currently in, or approaching, retirement?

New research funded by JRF and carried out by the Strategic Society Centre and NatCen shows high levels of financial disengagement among DC pension savers. The research found that only one in three workers aged 55 to 64 with DC pension savings keeps an eye on inflation, one in four keeps an eye on the stock market, and only 15 per cent keep an eye on financial ‘best-buy’ tables. And after retirement, levels of financial disengagement rise steadily throughout later life. The research also highlights limited use of different financial products, noting that the vast majority (85 per cent) of DC savers aged 55 to 64 don’t have an existing investment product, and 23 per cent don’t have a savings account or ISA.

The research also examined financial engagement among low-income (below the median) retirees with some DC savings or income. No more than 12 per cent of low-income households have an investment product, 34 per cent don’t have a savings account or ISA, and 41 per cent say they do not keep an eye on any economic or financial indicators (inflation, stock market, financial ‘best-buy’ tables). The findings suggest that financial disengagement plus freedom and choice could lead to lower incomes in retirement (i.e. money remaining in low-interest current accounts, and people not shopping around for the best deals).

We also know that the market for income products does not always operate to low-income customers’ advantage. More needs to be done to address the causes of persistent disadvantage through innovation, competition and regulation. It’s important that alongside greater freedoms, the government provides a financial safety net. The policy paper that accompanies our research proposes that the government defines, implements and promotes a default ‘automatic income plan’ for DC pension savers, to guarantee all DC savers access to a good-value, secure retirement income while retaining the right to cash-in their DC savings.

Freedom and choice about what to do with your pension pot is good news for many people approaching retirement, but it’s vital that there’s also a safety net in place. There’s a danger that people who are less financially savvy will struggle to convert their pension pots into the income that they need, with the stakes higher for those on low incomes.