Ensuring best value in retirement

Peter Gould discusses the issues clients face when trying to get the most from their retirement income.

There are currently over five million people saving for their retirement in defined contribution (DC) pension schemes, either using an individual arrangement or via membership of an occupational DC scheme.

Given the decline of occupational defined benefit (DB) schemes, DC scheme membership has swelled in recent years and this trend is likely to continue with most employers looking to automatically enrol their staff into schemes from 2012.

One impact of moving from DB to DC schemes is that the member is now taking a much greater responsibility for their retirement savings.

Preparing for retirement is a two-part process with members needing to consider how they save throughout their working life and then what to do with their pension fund at retirement.

Historically, the focus has predominately been on the accumulation part of the process with most of the effort being directed at communicating the importance of joining the scheme, the contribution levels and the choices of investment funds and strategy. 

While the accumulation of the pension assets is very important, there is a real danger that much of the good work achieved in growing the assets can be undone should a member make the wrong choices at retirement.

When the member reaches retirement there may be a tendency to think that it’s job done, leaving the member to make important choices either on their own or with limited help or guidance.

But in reality it is even more important for the right choices to be made as once an annuity is selected, the member cannot change their mind.

This differs from the accumulation stage where the member has the flexibility to change their investment strategy at any time, so a wrong choice may be corrected at a later date.

Shopping around

The Association of British Insurers (ABI) and The Pension Income Choice Association (PICA) are both working hard at improving the retirement process to promote shopping around and we are now seeing a slow improvement in the numbers of people taking the open market option.

However, the position remains that too few people are shopping around to get the best deal.

I believe that apathy is a real problem at this time with people doing what they are told or following the path of least resistance because they do not know better.

Potentially the member gets hit with a double whammy – a worse financial outcome combined with an inappropriate income type, for example not taking the option of a spouse’s income.