How complex are the decisions that pension savers need to make at - - PowerPoint PPT Presentation

Daniela Silcock and Mel Duffield Pensions Policy Institute Thursday 27 November 2014 www.pensionspolicyinstitute.org.uk

How complex are the decisions that pension savers need to make at retirement?

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For sponsoring this report and the Transitions to Retirement Series Sponsors as a whole.

• What decisions do people face at

retirement?

• How do people make decisions at and

during retirement?

• How will decision-making change in

future?

• Who is at greatest risk of making poor

decisions about their DC savings?

How complex are the decisions that pension savers need to make at retirement?

The main pension and retirement transitions can be grouped under the following five headings:

• Work and retirement transitions
• Accessing state pension
• Accessing DB pension entitlement
• Accessing DC savings
• Accessing other income and assets

What decisions do people face at retirement?

• Prior to April 2015 people over minimum

pension age with DC savings above and below a certain level must purchase a product which will provide a secure retirement income in

• rder to access DC savings
• After April 2015, all people over minimum

pension age with DC savings can:

• Purchase – a lifetime annuity, flexible annuity,

flexible drawdown, new products...

• Withdraw one or more lump sums from

uncrystallised pension funds

Decisions for those with DC pension savings will change after 2015

Annuity sales were 56% less in the third quarter of 2014 than they were in the third quarter of 2013

92,345 89,896 90,414 80,537 74,270 46,368 40,085

25,000 50,000 75,000 100,000 2013 q1 2013 q2 2013 q3 2013 q4 2014 q1 2014 q2 2014 q3

Annuity sales by quarter 2013 - 2014 Q1-3

• 56%

(from same quarter in 2013)

• 49%

(from same quarter in 2013)

Skills and knowledge necessary to make an informed decision about accessing DC savings

• What options are available
• Longevity risk
• Potential future needs incl health/social care
• Economic factors:

Inflation Market risks and returns Understanding of compound interest (and charges)

Decision making about DC pension will become more complex

Hard Easy

Difficulty of making informed financial decisions

Accessing DC savings Decisions regarding work and retirement Accessing DB entitlement Buying life insurance Buying a house Education vs. work Accessing state pension Buying a car Accessing non-pension income, savings and assets in retirement

• What decisions do people face at

retirement?

• How do people make decisions at and

during retirement?

• How will decision-making change in

future?

• Who is at greatest risk of making poor

decisions about their DC savings?

How complex are the decisions that pension savers need to make at retirement?

Transitions can be involuntary, particularly among people of lower socio- economic class (profession based) “Decisions” can be influenced by internal and external factors:

Cognitive factors Affective (emotional/feeling) factors Behavioural factors Attitudes towards external stakeholders Structural factors

Internal and external factors influence work and retirement transitions

Numeracy levels are low in the UK. Among UK adults: Around 4 in 5 adults have a low level of numeracy (below GCSE grade C level) Nearly one in five people cannot correctly identify the balance in a bank statement A third of adults do not understand the impact of inflation on purchasing power

Numeracy is correlated with the ability to make “good” decisions about accessing pension savings

• What decisions do people face at

retirement?

• How do people make decisions at and

during retirement?

• How will decision-making change in

future?

• Who is at greatest risk of making poor

decisions about their DC savings?

How complex are the decisions that pension savers need to make at retirement?

This project uses data from the English Longitudinal Study of Ageing (ELSA) Wave 5 (2010/11) Looked at people aged 50 to SPA in 2014 with private pension savings; DB or DC Projects forward assumptions about continued earnings and savings Those eligible are auto-enrolled in 2014 Assumptions regarding DB scheme closures – people already in DB schemes in 2014 remain until SPA

What will the next ten to fifteen years of retirees look like?

60% of people aged 50 to SPA in 2014 with DC savings, have pots

• f £26,100 or below

£0 £20,000 £40,000 £60,000 £80,000 0%-20% 20%-40% 40%-60% 60%-80% 80%-100%

Quintiles of DC savings for individuals aged 50 to SPA in 2014 (c. 560,000 per quintile) (2014 earnings terms)

£1.4m £5,200 £15,400 £26,100 £65,100 Quintiles of DC saving

Median £18,400

When today’s 50-SPA year olds reach SPA, 60% of those with DC savings will have pots of £27,500 or less

£0 £20,000 £40,000 £60,000 £80,000 0%-20% 20%-40% 40%-60% 60%-80% 80%-100%

Quintiles of DC savings for individuals aged 50 to SPA in 2014 at their SPA (c. 560,000 per quintile) (2014 earnings terms)

£2.2m £4,400 £12,900 £27,500 £68,000 Quintiles of DC saving

Median £19,400

60% of households (1.4m out of 2.4m) with DC savings and a member aged 50 to SPA in 2014 have total savings of £31,100 or below

£0 £20,000 £40,000 £60,000 £80,000 0%-20% 20%-40% 40%-60% 60%-80% 80%-100%

Quintiles of DC savings for households where at least one member is aged 50 to SPA in 2014 (c. 478,000 households per quintile) (2014 earnings terms)

£1.4m £6,500 £16,900 £31,300 £69,900 Quintiles of DC saving

When today’s 50-SPA year olds reach SPA, 80% (2.4m out of 3m) with DB savings will have annual entitlement of £14,400 or less

£0 £5,000 £10,000 £15,000 £20,000

0%-20% 20%-40% 40%-60% 60%-80% 80%-100%

Quintiles of yearly DB entitlement for individuals aged 50 to SPA in 2014, at their SPA (c. 595,000 per quintile)

£340,600 £1,500 £3,800 £14,400 £7,800

Median £5,400

Between 2015 and 2024, the median level of DC savings for those reaching SPA with DC savings will rise from £13,800 to £23,800 The 90th percentile could increase by around 75% from £79,800 to £140,700 There could be a dip in 2018 as many more pots are introduced as a result

• f auto-enrolment, but have not had

very long to mature

As more people reach retirement the average level

• f DC savings will increase

DC pot sizes will become successively bigger for future cohorts of people reaching SPA

£79,800 £93,800 £108,500 £140,700 £13,800 £7,700 £16,300 £23,800 £200 £800 £3,000 £4,000

• £20,000

£0 £20,000 £40,000 £60,000 £80,000 £100,000 £120,000 £140,000 £160,000 2015 2018 2021 2024

Percentiles (10th, 25th, 50th, 75th, 90th) of DC savings for individuals reaching SPA in 2015, 2018, 2021 and 2024 (2014 earnings terms)

90th percentile 75th median 25th 10th

Year in which cohort reaches SPA

• Around 5.7 million people currently (2014)

aged between 50 and SPA in England will have some private pension savings or entitlement at their SPA

• Around half of these people could have DC

pots of £6,300 or less (including those who will have no DC savings). Around three quarters of those with £6,300

• r less, could have DB entitlement.
• Around 2.1 million (of the 5.7m) people have
• nly DB at SPA, 2.7 million only DC at SPA

Over the next ten to fifteen years people’s pension savings portfolios vary

Those with high levels of DC savings are less likely to have DB entitlement

Groups divided by 25th percentiles of DC savings and shaded by level of DB entitlement (people aged 50 to SPA in 2014 at their individual SPAs)

655,700 1,109,600 1,258,900

No DB < 50th percentile DB > 50th percentile DB £6,300 or less DC savings

694,000 125,100 70,600

No DB < 50th percentile DB > 50th percentile DB £19,400- £51,300 DC savings

669,800 143,200 78,700

No DB < 50th percentile DB > 50th percentile DB £6,300- £19,400 DC savings

706,100 108,900 76,700

No DB < 50th percentile DB > 50th percentile DB £51,300-2m DC savings

• What decisions do people face at

retirement?

• How do people make decisions at and

during retirement?

• How will decision-making change in

future?

• Who is at greatest risk of making poor

decisions about their DC savings?

How complex are the decisions that pension savers need to make at retirement?

The research explores how different indicators correlate with pension saving portfolios. These provide information about the likely needs and characteristics of the segment groups. Socio-economic class Non-pension savings and assets Proxy indicators of financial skill and engagement, including numeracy

Different segments face different levels of risk

12% of people reaching SPA with private pension savings over the next ten to fifteen years are classified as being at high-risk of making poor decisions with their DC savings

These are groups with a significant level of DC savings - between £19,400 and £51,300 at retirement no additional DB pension to fall back on, little other savings and assets Low levels of financial skill and engagement Less likely to be targeted by advice industry

Risk is associated with dependence

• n DC and low levels of financial

skill and engagement

A further 29% of people (or 1.6 million over the next 10-15 years) aged 50-SPA in 2014 will be at medium-risk of making poor decisions with their DC savings Year on year the number with DC savings at medium to high risk could grow as a proportion of those reaching SPA with private pension savings 2015 - around 100,000 or 20% 2024 – around 240,000 or 55% Risk is associated with dependence

• n DC and low levels of financial

skill and engagement

People with DC savings and low or no DB entitlement are most “at-risk”

• f making poor decisions

DB DC

Yearly entitlement to £5,400 Yearly entitlement below £5,400 Yearly entitlement above £5,400 Savings of £19,400 Savings of below £19,400 Savings of above £19,400

Low DC/ No DB 12% Low DC/ 0-50th percentile DB 19%

Low DC/ 50th – 100th percentile DB 22%

Some DC/ 50th – 100th percentile DB 1% Moderate DC/ 50th – 100th percentile DB 1% High DC/ 0-50th percentile DB 2% High DC/ 50th – 100th percentile DB 1%

= high risk = medium risk = low risk

• Decisions about accessing DC pensions are

becoming more complex – but majority will continue to have small pots (under £30,000) What products and strategies will suit the majority of DC savers? Should products, advice and support be designed to target people with particular pot sizes? Should pot size determine what type of retirement income strategies and products people are “nudged” towards?

Conclusions and issues for discussion

• Those at highest levels of risk of making poor

decisions about their DC savings have lower levels of numeracy and engagement How are these people likely to respond to the new flexibilities? Will they engage with the guidance service? Or are the majority likely to just take their DC savings as a lump sum or sums? What guidance and advice services will be the most appropriate for these medium to high risk groups?

• Is there enough policy attention on groups of

people likely to have low to medium levels of DC savings?

Conclusions and issues for discussion