The dangers of just taking the path of least resistance

The path of least resistance can be tempting one to take but, as PLSA Chair, Richard Butcher says, it may not prove to be the best choice.

Picture the scene. 

Two people are sat in a pub garden – setting the world to rights – when one of them stumbles upon the topic of retirement.

And as part of that conversation, one of them says this.

“Months ago, all of the pension schemes that I’ve been paying into throughout my working life wrote to me. Huge great packs of documents. Meant absolutely nothing. I thought I might ask a financial adviser but they cost a fortune, so I did what I could do with it! There are loads of things they say you can do but it’s all very complicated. 

“But while I kept putting my decision-making off, the pension people kept pushing me to make up my mind. So, I took the easiest and least risky option. I got it all out and stuck it in my bank account. All sorted.”

Time for those imaginary alarm bells to ring out!

Working in the pensions industry, we know that 99 times out of 100 there would be a smarter thing for a saver to do with their retirement income than this. However, there are just too many people sleepwalking into the unknown without fully understanding the implications of the decisions they are making.

We know this type of conversation is happening all over the country and we in the pensions industry know that doing as was described here will, almost certainly, be the wrong decision for this saver. Yet they wouldn’t be alone in doing that! 

The 2015 Pension Freedoms gave savers greater choice about how to access their retirement savings. But there is a significant body of evidence that shows the confusing range of options is potentially leading to poor decision-making and poorer retirements. 

Too often the complexity results in people ‘choosing not to choose’ or taking a decision that may not be in their best interests. This can have significant negative consequences for their retirement living standard.

According to FCA numbers, taking cash at retirement is becoming the de-facto default for consuming pension savings and, by and large, people are consuming the cash too quickly. In fact, FCA retirement income market data shows that around 33% of pots worth between £30,000 and £49,000 were fully withdrawn. Looking back at 2019/20 FCA data suggests that 56.4% of accessed pots were fully withdrawn!

The path of least resistance can be a powerful thing (as Automatic Enrolment has proved) but it only has value when the pathway leads to a good outcome. 

During 2020, PLSA research found that nearly three quarters (71%) of savers in DC schemes want support when deciding how to access their pension, including some wanting to be guided by their pension scheme to a ready-made retirement income option.

When the PLSA asked around 2,000 pension savers and retirees about their current and future plans for drawing their pension as part of the survey, it found that, whilst the majority of workplace savers with DC pensions – who were yet to retire –  said they knew they would have to make a choice as to how to take their money, 30% either didn’t know about or understand their options, and only 28% had a clear plan about how they would do so.

It has led us to make proposals for Guided Retirement Income Choices. These would create a least resistance, least harm pathway to a sustainable income in retirement with soft defaults that could be opted out of (like AE) at any time. 

Without Guided Retirement Income Choices, too many people will get poor value, no return and run out of money.

Back in that pub garden, the PLSA’s proposals would probably have nudged that saver into a blended solution involving some cash for short term needs, some invested in drawdown for the medium term, and some set aside to buy an annuity in later life.