The majority of employees approaching retirement want to use their pension pots to deliver a secure guaranteed income, according to research by the International Longevity Centre.
Its Making the system fit for purpose report, which surveyed 5,000 people aged 55 to 70, found that 70% of respondents with a defined contribution (DC) pension scheme favoured using their pot to deliver an income in retirement.
The research also found that three quarters (75%) of respondents agreed with the statement: “I would prefer a secure guaranteed income over an income that might rise or fall depending on financial markets”.
When asked what proportion of their pension fund they could afford to lose, the most common answer amongst those with DC pots was none (35%). Just 7% thought they could afford to lose 20% or more of their fund.
However, the research found that while respondents want income security in retirement, many are confused about their options.
Only half of those with a DC scheme said they understood what an annuity is. Only 20% of respondents understood what an enhanced annuity was and more than a third (35%) understood what income drawdown was.
The research also found:
- 40% of respondents had made a plan for retirement.
- 40% of respondents with one year left before retirement had still not made a plan.
- 20% of respondents with a DC pot understood what a marginal tax rate was.
- 7% of respondents said paying for a holiday or car was most important in retirement.
- 5% of respondents said paying off debt was a priority.
Baroness Sally Greengross, chief executive of the International Longevity Centre, said: “These results underscore the significant challenges that lie ahead.
“By April 2015, we will need a fully functioning guidance guarantee, which supports the high proportion of pension savers who have low levels of financial capability and who are confused about what to do in the face of these new freedoms.
“But guidance alone will not be enough. An advice market that works for the many and not just the few is also needed, including mass-market advice that meets the needs of those with limited to moderate net wealth.
“And critically, there is an urgent need to determine how we support those who fail to take Guidance, or for those who take Guidance but are still liable to making poor decisions.”
Dr Ros Altmann, the government’s business champion for older workers, added: “It is clear from the research that there is an urgent need to help people understand more about how pensions work, and what their options are when deciding how to make best use of their pension funds.
“Even after decades of pension saving, many people have no understanding of the most important aspects of the pension system, which leaves them at risk of making poor decisions.
“The opportunity of more freedom and choice in future has the potential to deliver better value from retirement savings, but much work still needs to be done to help savers understand their options.
“Promoting take-up of the new guidance service will be vital to help millions of men and even more women make the most of their hard-earned pension savings.”