Pensions knowledge 'shockingly low'
People approaching retirement are suffering from "shockingly low" levels of pensions knowledge, putting them at risk of squandering their savings when they are handed new freedoms over their money pots this spring, new research has warned.
Women are more likely to be in the dark over basic terms which can be crucial when weighing up pensions options, according to a report, which was published by think-tank the International Longevity Centre-UK (ILC-UK) and guided by the Government's older workers champion Ros Altmann.
Research carried out among more than 5,000 people aged between 55 and 70 years old who are yet to retire or draw on their pension found that only one in three (34%) of women said they understand what an annuity is, rising to just over half (54%) of men.
Less than one in 10 (9%) women know what an enhanced annuity is, which is half the proportion of men who understand this term, at 18%, according to the findings .
The report warned that such low levels of financial capability could be exacerbated by new pension freedoms which are set come into force in April.
This could "result in people squandering their pension wealth, either by doing nothing in the face of complexity, by channelling money into high-risk investments or by taking all of their money out and leaving it in a low interest bank account," it said.
The findings came as a separate report from the Centre for the Modern Family, a think-tank set up by Scottish Widows, suggested that n early one in three people aged over 55 expects to come under pressure from family members to dip into their savings after the new pension freedoms come into force.
From April, instead of being herded towards buying an annuity, people with defined contribution (DC) pension savings will be able to access them as they wish from when they turn 55, subject to their marginal rate of income tax in that year. They will be able to take their money in one big lump if they want to, or in a series of slices.
But the ILC-UK report found that nearly four in 10 (39%) people with a DC pension who are less than a year away from retirement have yet to make a plan for their cash.
Nearly 70% of those with DC pension savings hope to use their pot to deliver some form of guaranteed income, while 7% said that paying for big ticket items such as holidays or a car was most important, and 5% said paying off debt was the priority.
But the report also found that many people do not understand the tax implications of taking money out of their pension pot, raising the possibility that they could unwittingly be pushed into higher brackets and lose 40% or 45% on their pension withdrawals.
When pressed about how to reduce their tax burden when taking money out of a pension, only half of those with DC pots correctly said that you should "withdraw it in small amounts over a number of years".
The report said that "worryingly", one in 10 people wrongly thought that you should "withdraw it all as one big lump sum" to limit the tax burden.
Annuities, which have been the traditional option for someone retiring with a DC pension, provide a guaranteed yearly income, usually for the rest of the person's life.
But they have been controversial in recent years due to disappointing rates and people not shopping around to get the best possible deal. People who are in poor health can potentially get a much better deal by opting for an enhanced annuity. Enhanced annuities tend to give higher payouts as the provider assumes that the recipient will have a shorter lifespan.
Dr Altmann said that levels of understanding of pensions appear to be "shockingly low", adding: " The problem is particularly severe for older women."
Free, impartial guidance will be launched for people making use of the pension freedoms, which will go under the branding "pension wise".
Dr Altmann said the pension wise service should be extended to all age groups as a requirement of the Government's scheme to automatically place people into workplace pensions.
The research, titled Making the system fit for purpose, found that w hen asked what proportion of their pension fund they could afford to lose, the most common answer amongst those with DC pots was none, with 35% of people with these pots saying this. Just 7% thought they could afford to lose 20% of their fund or more.
ILC-UK chief executive, Baroness Sally Greengross said: "T here is an urgent need to determine how we support those who fail to take guidance or for those who take guidance but are still liable to making poor decisions."
The ILC-UK research was supported by several retirement industry bodies. These are EY, Just Retirement, Key Retirement, LV= and Partnership.
A Department for Work and Pensions (DWP) spokesman said: "We are working hard to help people understand pensions and our reforms.
"Pension wise will help people make informed and confident choices about their retirement savings, we have launched a major campaign to help people understand the new state pension and the inclusion of personal finance on the national curriculum will help young people understand the importance of pension saving when they start their careers."