Reforms needed to help individuals make good use of their pension wealth throughout their retirement
01 April 2025Private sector employees are increasingly accumulating retirement savings in ‘defined contribution’ (DC) pensions (pension pots that do not guarantee a regular income through retirement). Since 2015, people over 55 have been able to withdraw money from DC pensions in any way they choose.
As this form of wealth becomes more important, people face too many complex and risky decisions through retirement. This increases the risk many exhaust their private resources and fall back purely on state pensions and benefits, especially later in retirement. Reforms are needed to make the system easier to navigate successfully in order to help reduce this risk.
This is the key conclusion of the latest reports of the Pensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust. The reports find:
The number of people making complex and consequential financial decisions about their pension wealth in retirement is rising substantially:
- Defined contribution pension wealth is becoming increasingly important. Median (middle) DC pension wealth (for those with some DC wealth) at retirement is set to rise from around £75,000 for those born in the early 1960s to around £130,000 for those born in the late 1970s.
- Unless people have significant traditional ‘defined benefit’ (DB) pension wealth, or they have bought an annuity (an income for life), people face a risk of exhausting their private pension wealth because they have lived longer than expected, and therefore seeing large falls in their income. This is a significant risk: our new analysis shows that, among 66- to 74-year-olds with private pensions, 40% of retired singles, and 45% of couples, would see their income more than halve if reduced to just relying on state support.
Encouragingly, the government is bringing forward a Pension Schemes Bill to help address this issue. It is expected that pension providers will be required to provide default retirement income solutions:
- For many, a ‘hybrid’ solution, in which – by default – people are able draw down on their pension wealth flexibly earlier in retirement, but annuitise their pension (buy an income for life) at older ages (e.g. at 75 or 80), would work well. This has been termed a ‘flex then fix’ model. It would provide a balance between flexibility earlier in retirement and security later in retirement when people are more likely to experience cognitive decline.
o But this kind of default solution will not be right for everyone. In particular, those with significant traditional DB pensions (e.g. if they have previously worked in the public sector) may have particularly good reasons not to want to buy an annuity with their DC pension pot. It may not work well for those with health issues that significantly reduce their life expectancy. Pension providers may well not know whether either of these cases applies.
- Defaults should therefore be ‘soft’, with a menu of alternative options provided to make it easy for people to choose other sensible options.
o Boosting the take-up of advice, guidance or some combination should also be a policy priority. 73% of those in their late 50s with DC wealth in 2021–23 did not recall using any sort of information about pensions and retirement choices in the last three years, and this includes substantial numbers of individuals with reasonably large accumulated pensions.
Bee Boileau, Research Economist at IFS and an author of the reports, said:
"The forthcoming Pension Schemes Bill is expected to introduce default retirement income solutions. Done well, these should improve outcomes for many, given the risks many face when drawing down pension savings through retirement at present. But key questions remain – in particular, there will be some for whom a retirement income default will not be right. The government and pension providers must ensure that it is straightforward to opt out of whatever new defaults are introduced, and that as far as possible those making these decisions are sufficiently informed and helped."
Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
"With a decline in pensions and products that provide an income for life, individuals increasingly bear the risks and complexities of managing their pensions. Financial decisions in retirement will become even more difficult as we age. This is made even more challenging by the myriad number of pension pots many will have to manage. Yet few take up advice or guidance. The current system is clearly not working. Consolidation of these pots and providing defaults on how to draw down retirement income will be essential."
Read full reports:
Individuals’ challenges managing pensions through retirement
As this form of wealth becomes more important, people face too many complex and risky decisions through retirement. This increases the risk many exhaust their private resources and fall back purely on state pensions and benefits, especially later in retirement. Reforms are needed to make the system easier to navigate successfully in order to help reduce this risk.
This is the key conclusion of the latest reports of the Pensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust. The reports find:
The number of people making complex and consequential financial decisions about their pension wealth in retirement is rising substantially:
- Defined contribution pension wealth is becoming increasingly important. Median (middle) DC pension wealth (for those with some DC wealth) at retirement is set to rise from around £75,000 for those born in the early 1960s to around £130,000 for those born in the late 1970s.
- Unless people have significant traditional ‘defined benefit’ (DB) pension wealth, or they have bought an annuity (an income for life), people face a risk of exhausting their private pension wealth because they have lived longer than expected, and therefore seeing large falls in their income. This is a significant risk: our new analysis shows that, among 66- to 74-year-olds with private pensions, 40% of retired singles, and 45% of couples, would see their income more than halve if reduced to just relying on state support.
Encouragingly, the government is bringing forward a Pension Schemes Bill to help address this issue. It is expected that pension providers will be required to provide default retirement income solutions:
- For many, a ‘hybrid’ solution, in which – by default – people are able draw down on their pension wealth flexibly earlier in retirement, but annuitise their pension (buy an income for life) at older ages (e.g. at 75 or 80), would work well. This has been termed a ‘flex then fix’ model. It would provide a balance between flexibility earlier in retirement and security later in retirement when people are more likely to experience cognitive decline.
o But this kind of default solution will not be right for everyone. In particular, those with significant traditional DB pensions (e.g. if they have previously worked in the public sector) may have particularly good reasons not to want to buy an annuity with their DC pension pot. It may not work well for those with health issues that significantly reduce their life expectancy. Pension providers may well not know whether either of these cases applies.
- Defaults should therefore be ‘soft’, with a menu of alternative options provided to make it easy for people to choose other sensible options.
o Boosting the take-up of advice, guidance or some combination should also be a policy priority. 73% of those in their late 50s with DC wealth in 2021–23 did not recall using any sort of information about pensions and retirement choices in the last three years, and this includes substantial numbers of individuals with reasonably large accumulated pensions.
Bee Boileau, Research Economist at IFS and an author of the reports, said:
"The forthcoming Pension Schemes Bill is expected to introduce default retirement income solutions. Done well, these should improve outcomes for many, given the risks many face when drawing down pension savings through retirement at present. But key questions remain – in particular, there will be some for whom a retirement income default will not be right. The government and pension providers must ensure that it is straightforward to opt out of whatever new defaults are introduced, and that as far as possible those making these decisions are sufficiently informed and helped."
Mubin Haq, CEO of abrdn Financial Fairness Trust, said:
"With a decline in pensions and products that provide an income for life, individuals increasingly bear the risks and complexities of managing their pensions. Financial decisions in retirement will become even more difficult as we age. This is made even more challenging by the myriad number of pension pots many will have to manage. Yet few take up advice or guidance. The current system is clearly not working. Consolidation of these pots and providing defaults on how to draw down retirement income will be essential."
Read full reports:
Individuals’ challenges managing pensions through retirement