Andrew Pennie asks why income drawdown is not more widely promoted in decumulation strategies.
Auto-enrolment has driven many aspects of DC pension plans into the limelight for debate and modifications but the goal of turning DC savings into an adequate retirement income for retirees remains the elephant in the room.
Auto-enrolment will continue to be at the forefront of news and discussions for some time to come, particularly when smaller employers, many of whom are totally unprepared, become affected by the new legislation.
But let us not forget the thousands of DC scheme members who are retiring every month and are being poorly served for one of the biggest financial decisions of their lives and at a time when generating retirement income faces unprecedented challenges.
Current retiring DC members are often making ill-informed and dangerous decisions about how best to generate their retirement income. A few recent statistics I have read in the press include:
• 6 out of 10 married men opt for a single life level annuity;
• 40% of those selecting a level annuity were not aware of the availability of a joint annuity;
• only 50% of retirees use the OMO (Open Market Option) when selecting an annuity;
• over 50% of annuity clients were eligible for an enhancement, yet only 13% actually received an enhancement.
The steps being taken by the ABI to promote OMO and the actions of many DC schemes to promote and facilitate an OMO service are honourable but in our opinion these fall short in many areas.
Getting a retiree to use the OMO service is often seen as a benchmark of success but what if that person then buys the wrong shape of annuity or should not really buy an annuity at all? More needs to be done to help retirees make better retirement income decisions.
Factors affecting annuities
We know that low gilt yields and increasing longevity have had devastating effects on annuity returns and while annuities will always remain a major piece of the decumulation puzzle, they are a one-way street that will not be right for everyone.
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