Post Budget At Retirement Market - Qualitative Consumer Research

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1 Post Budget At Retirement Market - Qualitative Consumer Research Commissioned by syndicate members: This report is for media use only and may not be reproduced or circulated in its entirety. Any quotes or references taken from the research should be sourced as follows: Ignition House Research commissioned by AXA Life Invest, Friends Life, LV= and NEST conducted in May Ignition House, July

2 Key Findings Respondents no longer expect to retire on a set date with phased retirement now seen as the norm. For those on lower incomes, this was being driven by financial need and for the more affluent, the desire to retain an active mind. Age 70 is perceived as being old however, and was considered a good time to stop work completely. Only a self-employed few thought they would continue to work beyond that age, health permitting. All participants expressed the sentiment of uncertainty about their future, with a sense that they could not plan adequately because they could not know what would happen to them in the near, mid or long term. Many participants mentioned that they could be knocked over by a bus and focused almost entirely on the active early years of their retirement rather than the mid or long term. I do think I will be comfortable, but that s only because I still expect to do my bit and my outgoings are fairly modest. Age 50-55, Basic Rate Taxpayer Individual Pension The majority of respondents thought that they had not saved enough for a comfortable retirement; basic rate taxpayers in particular felt ill-prepared although a significant proportion of higher rate taxpayers shared their concerns. Those that had planned well felt affected by goal-post changes which ranged from the changes to state pension age; falling values in pension pots; the need to support children through university and; changes in personal circumstances such divorce. Even those that felt they would be comfortable in retirement were aware this situation could change at some point, leaving them exposed. Although most respondents had a positive view of pensions and expressed some interested in them, many found them difficult to understand and confusing, and this often led to disengagement. As a result very few were actively engaged in their pension planning. While the majority of respondents claimed to be monitoring their pot, this proactivity was limited to looking at annual statements which were often not well understood. Although most participants in Group schemes (such as company sponsored defined benefit or defined contribution schemes had online access to their pension, few had made use of this online service. Respondents, especially the younger segment, struggled to say how much income their pot would generate. Ignition House, July

3 All participants saw owning a property and realizing its value as a key way of delivering more money in retirement should they face a shortfall. Overall participants perception of owning a property was largely positive much more so than saving through their pension. Down-sizing was seen as a fallback but many respondents had little understanding of how it would work in practice and how much this would yield. They typically failed to take account of frictional costs such as stamp duty, solicitors fees and had not thought whether a suitable property would be available in their area at a significantly lower cost than their current home. Similarly only some understood the tax implications when applied to buy-to-let. Respondents who had already used down-sizing as a strategy had been left disappointed with the results. People felt that anticipating an inheritance from their parents (to provide or supplement their pension) was too morbid they did not want to think about their parents death and viewed a reliance on potential inheritance money as unwise due to the potential need for long-term care for their parents. On the other hand, leaving something for their own children was considered important. Pensions were generally felt to be for spending and property was their legacy but at the same time participants resented the fact that they would have to give up any remaining money in their pension upon their death. Equally participants preferred not to think ahead to the costs they would incur for long-term care, choosing to focus on the early years of retirement when they would be happy, healthy and able to make the most of their retirement. Few were looking into financial strategies to protect their estate. What are people looking for from their pension products? Fear of financial loss is key determinant in how people view pensions and pension solutions. Potential losses identified include: falling fund values; the opportunity cost of not remaining invested; the negative impact of inflation and, in the case of annuities; complete loss of all savings in death. Unsurprisingly then protection and security are the features most valued in retirement products by respondents, followed by accessibility to funds; the ability to increase income and the ability to bequeath. Lastly but still highly valued, are flexibility and the ability to make changes, as well as the receipt of regular updates and opportunities to assess options. While all respondents valued guaranteed income features and protection from falls in value, higher rate taxpayers appreciated this feature more highly than basic rate taxpayers, who valued more the Ignition House, July

4 ability to withdraw lump sums. The ability to grow income if markets rise, and to be able to change products was considered more important for those closer to retirement. Understanding of the current pensions system and Budget reforms Most respondents had a low level of understanding of the current pension system, with many completely unaware of what an annuity was, let alone the impact of the reforms on their obligation to buy one. Others had no understanding, or a low level of understanding of how they work. Of those who were aware of annuities, the perception was that they were bad, however this was based on little substantive information. Through media coverage, they understood annuities to be bad, poor value for money and at worst, a rip off but few could explain why. Others had a vague notion that this was because rates had fallen. Respondents closer to retirement had a better idea of annuities and a few respondents were able to demonstrate they understood pay back calculations as a way of working out when income paid out would exceed the amount initially invested. Respondents liked the idea of secure income from annuity but did not like the idea that the pot of money was no longer theirs and that they would be unable to pass on to their dependents when they died. However, when respondents were previously asked about important features of pension products, the ability to pass money on to dependents was not ranked particularly high in comparison with other features. Ignition House, July

5 There was limited awareness of other products such as drawdown and impaired life annuity and there was no awareness of variable annuities and value protection annuities, even among the most sophisticated and those with an IFA. Many respondents had low levels of understanding of the current pension system and reforms. While tax-free lump sums were recognized as a potential benefit of a pension, the details were not understood by the majority of respondents, some of whom did not understand the taxed as income concept generally. Most people had not realised either that they could already access this tax free cash from age 55 onwards. Once explained and understood, the general perception was that budget changes were a good thing, particularly the idea that savers were now gaining control. While many respondents thought they would be sensible in the new world of individual responsibility, there were concerns that others may behave recklessly. Some also raised concerns that rules may only change again in the future. Impact of Budget reforms Respondents generally felt that Budget changes had made saving into a pension more attractive but, there were some minor doubts that changes would actually happen. Around half of the people we spoke to were now more open to paying more into their pensions but affordability was an issue among most. Others felt that they were saving enough with a pension and that they wanted to spread their investments. This was despite being told about the tax advantages of pensions and the opportunity of Group scheme members to have any increase they might make matched by employers. Lack of understanding of tax relief and lack of awareness that contributions to pensions could be made as lump sums prevailed. When understood, more considered the possibility of using cash ISAs and money from deposit accounts, although many were wary of pensions falling in value. Money from inheritance is unlikely to make its way into pensions, with many feeling that they could make this money work harder elsewhere, perhaps through property. Ignition House, July

6 Tax implications not clearly understood While commonly recognized as a feature, only a third of those interviewed had a good understanding of how the tax-free lump sum currently works. Understanding of the exact amount was hazy, ranging from somewhere around 20% to a fixed lump sum of around 10K. Only two respondents were aware that pre-budget pension withdrawal above a specified amount was possible, but subject to a penal tax rate. Most had missed that, post Budget, the remaining 75% of their fund would be taxed - although this came as no surprise. Some respondents did not understand the tax system in general and needed help understanding the basic rate and higher rate tax thresholds. It was clear that taxed as income was not a well understood concept and needed careful explanation. Tax relief on pensions was also not clearly understood. The need for education was particularly prevalent for Group scheme members and basic rate tax-payers as, for them, this was often handled at source. Several basic rate tax respondents said they were very surprised to hear that the Government was topping up their money in this way and wondered why no one had told them about this benefit before. Even after explanation, there was still confusion around whether saving for a pension was more tax-efficient than an ISA. Pre and at retirement Despite voicing concerns that people might take their pension pots out and blow it, leaving many more people dependent on the state, the majority of people we spoke to did not intend to take their whole pension in one go and spend it; only two respondents intended to do this; but one had a large DB pension plan to live off and the other felt that he had few responsibilities and therefore, could afford to be more carefree. Although respondents would not want to buy a Lamborghini with their pot, they would probably want to access some money. Here, they were looking mostly at taking some, or all, of the tax-free sum when they stopped working, not before. Despite reporting earlier that they probably did not have enough saved for retirement, they had not considered the implications of this on their lifetime income. Respondents were strongly minded that the rest of the pot would be needed to live off and were unlikely to want to buy an annuity. They were unsure whether they would keep their money Ignition House, July

7 invested in their pension and draw it down; feeling that it might be better to move it to a safer place, or somewhere where it would do better. Many however, didn t have a particularly sensible long term investment strategy for this, thinking about cash ISAs or similar. Many, particularly the lower income groups, saw their remaining pension as a safety net for unexpected life events. Post-retirement In terms of managing the drawdown process, respondents struggled to see beyond a ten year window when thinking how they would manage their lump sum. Most respondents preferred to take a smaller lump sum today than spread a larger amount over 20 years. This was despite being fairly accurate in their estimation of their life expectancy, which they based more on family circumstances rather than official data. Some respondents struggled to know how much income per year they would expect to take from a specified ( 100K) pension pot, with most reporting what they would like to live off rather than making a more accurate estimation based on life expectancy and investment return. Investments were a particularly difficult area for respondents to understand. Generally, they did not fully grasp what they were currently invested in and how life-styling works, or the implications of holding their entire their fund in a safe deposit account for 20 years. They didn t appreciate that they might spend as long drawing down their fund as they did building it up; the importance of investment return on how long their money will last; nor the implications of a fall in the value of the fund early on in retirement. Graphical stimulus and tools provided as part of the research helped respondents understand the choices they face. Ultimately, however they reiterated the fact that respondents would face difficult and uncomfortable decisions in the future if they were to adopt a DIY approach to generating their lifetime income. Respondents preferred not think about what would happen if they ran out of money as they saw it as an event too far in the future, probably occurring at an age (in their 80s and 90s) where they thought they didn t need as much income, thus ignoring their potential long-term care needs. Should such a situation occur, they felt that the state or their children would need to help them out. Guidance It was clear from the research generally that key areas where respondents needed help to make the best decisions often stretched beyond pensions and retirement options to cover related basic planning concepts like income tax thresholds, state benefits, and estate planning. Despite this, the Ignition House, July

8 guidance promise is expected to be quite limited. Furthermore, respondents are looking for and expecting guidance to cover their particular situation. Guidance is likely to be popular as respondents are aware of their low baseline of knowledge and the impact of making a wrong decision. Participants ideally wanted multiple face to face sessions with impartial experts who understood their situation. Multiple guidance sessions were seen as preferable to build confidence and to help them gain a broader perspective. Even those with IFAs felt that guidance would be beneficial as it would equip them to better utilise their advisor s time and expertise. Respondents would prefer face-to-face meetings but were realistic about the feasibility of this. If guidance were to be offered in group settings, then smaller groups of around would be preferred to a large presentation. While general sessions providing generic information and information would be welcomed, the focus groups and interviews suggest that what people really want is advice that is tailored to their particular needs and circumstances, not generalised guidance which could apply to anyone. However, many would baulk at costs over 500 which is below the minimum 1000 threshold frequently charged by independent financial advisers once again suggesting that there is likely to be a significant advice gap unless a low cost solution can be found by the industry. Overall Once the budget changes were explained, understood and put in the context of the current system, engagement levels with pensions increased across the board. Overwhelmingly respondents felt that changes made pension saving more attractive. For some, they now saw them as saving for retirement products, suggesting that they should no longer be called pensions, as that term had negative and confusing connotations. The budget changes have presented the industry with a significant opportunity described by one respondent as the most significant change to pensions in the last twenty years. Education will be needed to ensure that consumers are equipped to make complex decisions that will deliver the best lifetime outcomes. Ignition House, July

9 Methodology 87 participants were consulted through a combination of six focus group and 40 face-to-face interviews held across the UK (London, Manchester, Leeds, Bristol, Glasgow and Birmingham) in the period 7 May to 16 May Those participating were split in terms of gender (45 males and 42 females), and age with 49 people aged and 38 aged respondents were in Group schemes and 44 were in Individual schemes, with 41 respondents taxed at the basic rate and 46 at the higher rate. Respondents were recruited to have DC as their main pension scheme. Pot sizes ranged from 50,000 to 250,000. Ignition House, July

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