The way in which income is drawn from pension pots by default should be tailored by providers to reflect the diverse preferences and needs of different groups of pensioners, a new report has suggested.
Currently, savers are largely left to their own devices as to how they draw on their pension pot through retirement. However, legislation shortly to be presented to Parliament will place a legal duty on pension providers to offer a ‘default’ post-retirement journey. This is designed to help shape how retirees draw money out of their pension if they make no active choices.
To inform these decisions, a new report ‘Downhill all the way?’ by pension consultants LCP and the University of Bath has analysed data on the spending patterns of over 100,000 pensioners collected between 1968 and 2019.
The findings from the report reveal that for most pensioners retiring today with just a DC pension pot, the State Pension will provide the majority of income in retirement.
It also shows stark differences between groups of pensioners, with those renting from a social landlord tending to have relatively flat real spending. In contrast, homeowners tend to ‘front load’ their spending, but this spending on luxuries drops sharply as they get older.
Steve Webb, partner at LCP, said: “The starting point for designing post-retirement products should be analysis of what pensioners actually spend. This data provides startling evidence of the diversity of pensioner preferences and in particular, that homeowners strongly prefer to spend more of their retirement wealth in the earlier part of their retirement, whereas renters may want and need a steadier income.
“The more that providers can find out about their savers, the more the post-retirement journey can be tailored to be a good fit for different groups of pensioners.”
Dr Ricky Kannabar, senior lecturer at the University of Bath, echoed the sentiment, noting that the research has highlighted the importance of understanding how pensioner spending changes across cohorts.
Kannabar said: “In particular, pensioners are not a homogenous group and analysis by housing tenure highlights large differences in the spending levels and behaviour exhibited by each group. Further research on the determinants of pensioner spending in retirement and how this has changed over time is needed to adequately inform the design of drawdown products.”
Claire Altman, managing director for individual retirement at Standard Life, said knowing how much retirees will need to spend and when is a “key question” for both the industry and policymakers looking to address retirement challenges.
“While a difficult question, for those planning for their retirement, considering all your essential costs in retirement can be a useful place to start, and decumulation strategies that factor in a mix of different retirement income solutions can often be the best way forward. These allow individuals to meet any fixed costs through an element of guaranteed income, plus solutions such as smoothed funds that provide the opportunity for investment growth whilst mitigating the impact of market volatility.”
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