One in three retirees who have chosen to keep their savings invested instead of buying an annuity are first-time investors, new research shows.
Income drawdown has become a highly popular way of funding retirement since pension freedoms were introduced three years ago, and is now more common than buying an annuity that provides a guaranteed income for life.
However, 32 per cent of retirees who have chosen this option have no investment experience, according to a survey of 742 people carried out by YouGov for Zurich UK.
Pension pot options: One in three retirees who have chosen drawdown are first-time investors
The study also found that two in five, or 41 per cent, have not received either financial advice or guidance about drawdown and warns that such lack could leave pensioners at risk of running out of money in retirement.
It comes as 345,265 pension pots were moved into drawdown between October 2015, when pension freedoms where introduced, to September 2017.
That’s more than double the number of annuity purchased during the same period, which stood at 152,843, according to the most recent data by the Financial Conduct Authority.
Nearly half a million people (just over 431,000) are using drawdown now, according to Zurich’s calculation – which is based on the assumption that the number of people choosing drawdown has increased at the same pace than it has during those two years.
However, this means that tens of thousands of those relying on drawdown for their retirement years have not sought regulated financial advice or guidance – despite having never actively invested in the stock market, according to the report.
Assuming that drawdown would be simple was the most common reason for that, with almost half of novice investors who had not received advice saying so.
Putting savings at risk? But a third claimed they were confident in their investment decisions
A further third claimed they were confident in their investment decisions, despite having no previous experience of actively investing.
But Zurich warned that poor decisions in drawdown could lead to consumers taking on too much risk, missing investment growth or making unsustainably high withdrawals.
‘As double the number of people choose drawdown over annuities, Britons clearly favour the freedom and flexibility, but the issue is that many appear to be underestimating its complexity,’ Alistair Wilson, a pensions expert at Zurich, said.
‘In the build-up to retirement, many savers rely on pension firms to make investment decisions on their behalf, meaning many have no hands-on investment experience when they take control of their pot.
‘For retirees not getting advice or guidance, there is a danger they could end up picking the wrong investments or taking money out of their pot too quickly. This is putting a worrying number of people at risk of running out of money in retirement.’
The warning follows that of the FCA, which warned many people are dipping in to take a 25 per cent tax-free lump sum after turning 55 despite not intending to retire yet, then making poor investment moves with the rest of their pots.
Women were more likely to be first-time investors than men, with a percentage of 41 per cent admitting so as opposed to 29 per cent of men.
One in ten people said they relied on Google to figure out how drawdown worked, while one in five looked at newspapers and magazines.
Pension firms were the leading source of guidance for a third of consumers, though 44 per cent of all those in drawdown confessed they would never get advice or guidance.
Zurich said the Government should reconsider the case for introducing mandatory guidance for drawdown, requiring people not getting regulated financial advice to opt either in or out of receiving guidance before accessing their pension.
It also said would also like to see the introduction of free drawdown MOTs to help consumers not getting advice check that they are on track in drawdown.
It comes as the Financial Conduct Authority is currently weighing up new protections for over-55s using pension freedoms.
New ‘default’ income drawdown plans and a cap to prevent people paying ‘excessive charges’ for them are being considered, and could emerge in proposals due out by the summer.
The watchdog has also joined money experts raising the alarm about people switching retirement pots into current or savings accounts and letting them get gobbled up by low interest rates and inflation, or becoming liable for income tax.
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