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24 April 2015

Faced with ‘pension freedom’, people need sound financial advice more than ever.

More than a quarter of all British people approaching retirement don’t know where they will put their pension savings after April 2015. This particular finding from BlackRock’s latest Investor Pulse survey1 highlights a growing need for financial advice, given the recent changes to the pensions regime. This, the second of three articles on Britain’s savings habits, looks more closely at some of the survey’s results.

The key change which has just come into effect is that pension savers are no longer required to buy an annuity – they have ‘pension freedom’. One direct result, as BlackRock’s research shows, is that fewer than one in ten future retirees now say they are likely to purchase an annuity. And 28% simply don’t know what they will do with their retirement savings.

The need to take personal responsibility is growing, but the lack of retirement planning and financial knowledge means that many people are reluctant to act. The majority of people say they do not know how much they should be saving, and 44% haven’t started saving for retirement at all.

While the average UK investor would like to maintain three-quarters of their current income after they retire, they underestimate the size of the pension pot needed to realise their expectations. Those surveyed would like to achieve, on average, £26,000 a year and think a pot of £259,000 towards an annuity will do it. In fact, they would need a pot of £479,000.2

Lack of confidence

People have a distinct lack of confidence in their retirement plans. Only 32% of them believe they will enjoy a comfortable retirement, and 38% think they will never be able to retire fully. Nearly half (45%) say they are concerned about outliving their savings.

It is clear, BlackRock says, that many people lack the financial awareness to make the most suitable decisions about how to fund their retirement. Annuities have been a good way of generating a secure income for life. However, faced with the freedom to choose how to invest their savings, many people could end up making the wrong choices.

That’s not to suggest they would blow it all on having fun. In a separate survey this month, PricewaterhouseCoopers found that only 1% of those asked would spend their pension pot exclusively on treating themselves. But in the BlackRock study only 7% of those aged between 55 and 74 say they would use their full pension to buy an annuity. One in ten would withdraw it all and invest it “elsewhere” and a similar percentage would put it all into a cash savings account, in spite of the fact that returns on cash are at historic lows.

Pensions graph

Source: BlackRock Investor Pulse Survey, January 2015

Cash by default

Indeed, if they find the decisions facing them when they get their pensions too daunting, many savers may opt for the perceived safety of cash – among the least efficient means of generating income in retirement.

BlackRock found that much of the UK’s current retirement savings are already being channelled into Cash ISAs, where they are earning a marginal return. It also discovered that, while half of retirees are already using an ISA to help fund their retirement, 64% of them have used only Cash ISAs, with very few selecting the stocks and shares version. Even among pre-retirees (aged 55 to 64), who should be focusing on growing their retirement pot, it found that 68% held all their ISA wealth in cash.

With many feeling ill-equipped to make the choices they face at retirement, pension freedom brings with it the need for further financial advice. But of those who had retired in the past 10 years, only 22%1 discussed their finances with an adviser. A similar number (23%) took no steps at all to help them deal with the financial impact of retirement, and only 15% of those aged 55 to 64 currently uses a financial adviser.

Guidance is not advice

The government has chosen the Citizens Advice Bureau to offer free face-to-face guidance, while The Pensions Advisory Service will provide guidance over the phone. But the guidance is only provided shortly before and at the point of retirement and, as Andrew Stokes, Head of Pensions at St. James’s Place, says, most people need help much earlier.

Stokes also points out that, while it’s easy to confuse the two, guidance is not advice. “Guidance will not provide investors with the answers,” he notes, “and many investors will still need advice from a qualified financial adviser.”

1 January 2015

2 William Burrows, January 2015  - Adjusted calculation for annual income of £26,000 based on £100,000 joint-life annuity for a male age 65 and female age 60, with level payments guaranteed for 5 years. This estimate does not take into account any other savings, sources of income or state benefits which may be received in retirement.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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