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Pensioners need ‘significantly more help’ to ensure lifelong income

Written by: Paloma Kubiak
Millions of pensioners are exposed to risks they don’t understand and need 'much more' help in order to benefit from the pension freedoms introduced in April 2015, a major report has found.

The two-year study by the Independent Review of Retirement Income (IRRI), a body set up by the Labour party in 2014, welcomed the government’s reforms giving pensioners more freedom and choice but said savers needed ‘significantly more help’ than they are currently getting.

The report highlighted the major risks of pension saving, including investment risk, inflation and longevity risk. It said many ordinary defined contribution scheme members did not understand the full consequences of making a wrong decision.

The report calls for appropriate products to be developed to ensure accessibility, inflation protection, minimal involvement by individuals who don’t want to manage investment risk and longevity insurance.

It said that no single product currently meets all these requirements and a “hybrid solution” or a “safe harbour retirement income plan” for people to get the best combination of retirement income products should be introduced.

Challenge for industry

Professor David Blake, chair of the IRRI and director of the pensions institute at Cass Business school, said: “A great deal of effort will now have to go into re-establishing what a good pension scheme is.

“This will need a commonly agreed national narrative. Without this, people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with. This is a significant challenge. But it is one that’s well worth the effort because as the Pensions Minister, Ros Altmann says ‘pensions are precious’.”

However, Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the vast majority of their customers are making good investments.

He said: “Based on Hargreaves Lansdown’s analysis of 27,000 self-managing drawdown investors, we are confident that the vast majority are making good investment and income withdrawal decisions. This doesn’t mean there aren’t risks ahead, but it does mean we shouldn’t rush to assume the present system isn’t working.”

He added that a safe harbour product as described in the report may not be any more achievable than a perpetual motion machine and said the products available today are “largely fit for purpose already”.

The challenge facing pension savers, McPhail said, is to make sure they’re helped to engage at a level which works for them in order to make good decisions, even if that is simply to buy an annuity.

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