Savers have many options at retirement for what to do with the Defined Contribution pension pot they and their employer have paid into. But these options shouldn’t distract the savers from the fact that a regular income, to cover the ongoing costs of living in retirement, is needed.
A regular retirement income matters because:
- Savers face ongoing costs in retirement, just as they did while they were working. These costs could be must-haves, like housing, or nice-to-haves like holidays
- Savers’ regular wages may stop when they retire, but their regular costs don’t
- The costs go up over time, so savers’ incomes needs to go up to cover them
We believe a steady income, preferably linked to inflation, is still the best option for most savers despite the flexibility introduced by the ‘freedom and choice’ changes in the 2014 Budget.
A one-off cash lump sum, while tempting, won’t pay retirement’s regular bills in the long-term. The lump sum might also lead to a higher tax bill. So, pension schemes should only offer cash to members as an option, not a ‘default’ for those who don’t choose a target for their savings. That way, if a cash lump sum is more appropriate for some savers, they can pick that option.
Even so, only 30% of larger Qualifying Workplace Pension Schemes, used for Automatic Enrolment, have made a retirement income the default choice for their members.
The full article is available here.