Many people saving for defined contribution pensions have no idea what their income will be after they retire or ever consider this in light of how long they might live. Those who do are bound to underestimate their life expectancy by a wide margin, a study published on Friday shows.
The research, by the Institute for Fiscal Studies and funded in part by the National Association of Pension Funds, underscores the challenges facing policy makers as the country shifts from defined benefit pensions, where employers provide income in retirement, to the defined contribution system, where employers help staff save to buy an income stream, or annuity, from an insurer.
In the latter system, retirement income depends on the amount paid in and how well the assets in the scheme perform, rather than on years of service and earnings, as is the case with defined benefit pensions.
The defined contribution system is on the rise as defined benefits have become far less common and more individuals save money in an investment pot to buy an annuity.
“Defined contribution pensions require people to make complex decisions, both while they are accumulating their pension savings and when they want to start drawing an income,” said Gemma Tetlow, a programme director at the IFS and co-author of the report. “Understanding how people have been coping with … decisions over the last decade is important as policy makers consider and implement further reforms to this market.”
The study found that a third of those close to retirement age had no idea what their pension would be, but for those saving through a defined contribution scheme the proportion was considerably higher, at 40 per cent. It also found that those aged 50 to 64 with defined contribution savings pots are too optimistic.
On average, their pension pot would have to grow 77 per cent, or £20,200, to match their expectations.
Joanne Segars, NAPF’s chief executive, said: “The average saver with a defined contribution pension is being over-optimistic.”