The new pension freedoms coming into force on 6 April 2015 could result in 1.4 million people having inadequate retirement incomes, according to research by the International Longevity Centre UK (ILC-UK).
Using data from the largest survey of over-50s in the country, the ILC estimates that 1.1 million people could face retirement income shortfalls later in life, even if they buy annuities.
However, an additional 350,000 people would not have enough retirement income if defined contribution (DC) scheme members used the pension freedoms to spend significant portions of their money on “big ticket items”.
This would result in a total 1.4 million people lacking a secure income for the rest of their lives.
In order to combat future income shortfalls, the ILC has recommended that:
- annuities play a leading role in the retirement strategies of people with DC pots
- annuity branding emphasises safe guaranteed income to combat the perception of risk
- DC scheme members over 50 are given free financial guidance
- an independent Pensions Commission be created to shape a more coherent pensions policy.
Ben Franklin, senior research fellow at ILC-UK, said:
“While we do not advocate that everyone should take a particular course of action, our analysis clearly highlights the benefits of annuitising for those individuals who have a high concentration of wealth in DC savings.
“Annuities are generally misunderstood and the group who stand to lose the most from spending everything too early, also score relatively poorly on financial capability, making them particularly susceptible to poor decision making. Without the appropriate support including a new default strategy, these individuals could end up significantly worse-off in retirement.”