Transitioning from ploughing as much as possible into a pension to working out the most efficient way to make it last when drawing an income in retirement can be tricky. Now the government has proposed a solution; guided retirement. But will it work?
Guided retirement would require workplace pension schemes to provide a default pension for savers approaching their post-work stage of life.
“After years of saving into a defined contribution pension, savers will have the option of a stable income for the rest of their lives, without having to become investment experts overnight,” the government said.
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The proposals are still being consulted on, so more detail will be released in due course. But based on what we know so far, what could guided retirement look like for those approaching retirement in the coming years and is it likely to leave retirees better or worse off?
Guided retirement proposes the introduction of default pensions for life for the mass market that would remove the need for individuals to make complex decisions about how to turn their defined contribution savings pots into an income in retirement.
Under guided retirement, pension providers would have to design or identify default pensions that are appropriate for the needs and interests of the cohort they are intended to serve (they will not be individualised).
However the government recognises people approach retirement with differing circumstances, preferences, and levels of financial resilience, so default pensions would not be mandatory.
Instead they would sit within a broader range of support designed to ensure individuals who want to do something different with their retirement pot – like go into drawdown – can make choices that are best for them.
Default pension options would provide protection against the risk of running out of money in later life. These could involve annuities, collective pension arrangements or other approaches to managing withdrawals and longevity risk.
Becky O'Connor, head of pensions at PensionBee, explained: “The size of your pension pot doesn't change simply because you enter a default pension, but how it is invested and converted into an income could change significantly.”
Currently, when you retire, you're largely left to decide how to turn your savings into an income that lasts. You can take cash, buy an annuity, draw down as you go, or combine these options. Under guided retirement, your pension scheme would do some of that thinking for you.
“When you ask to access your pot, you'd be offered a ready-made option designed to provide an income throughout retirement. But the choice should remain yours: you can accept the suggested option or choose another way to use your savings,” O’Connor said.
The proposal has “some clear positives for pension savers and retirees”, said James Heal, director of public policy at St. James's Place: “It is clearly aiming to improve outcomes and recognises that longevity risk is a big issue for the defined contribution pension…
