Legal & General Investment Management (LGIM) has joined forces with NMG Consulting (NMG) to investigate how well-equipped today’s UK savers are for non-advised drawdown five years on from Freedom and Choice.
A survey of nearly 1,200 non-advised existing and prospective drawdown users’ finds that over 60 per cent of prospective retirees support the introduction of Investment Pathways.
The Investment Pathways initiative, which is intended to clarify the choices savers have and encourage them to take an active route through their retirement years, is supported by almost 70 per cent of retirees-to-be under 55, and 60 per cent of prospective drawdown Baby Boomers over 65.
The strongest interest in Investment Pathways comes from pre-drawdown savers with pot values between GBP30,000 and GBP100,000, which represents the majority of the non-advised drawdown market. Savers praise the clarity and simplicity of Investment Pathways, with nine in ten consumers being able to align at least one of the options to their needs, while 60 per cent felt confident enough to make an independent decision following the guidance they received. Only 12 per cent of prospective users felt the need for more formal financial advice.
Meanwhile, more than half of existing drawdown users think Investment Pathways are too basic, due to their lack of fund choice: a third of respondents want to choose from a small shortlist of funds, while a fifth would prefer a wider fund choice.
When it comes to available options, income drawdown is the most popular pathway for both prospective (46 per cent) and retired drawdown customers (43 per cent).
Similarly, the vast majority view withdrawing all of their money as a reckless, inappropriate option and any decision would need to be accompanied by detailed risk information.
While choosing a single pathway was the most popular strategy for prospective drawdown users (38 per cent), over a third (36 per cent) said they would split their pot between pathways and many said they would migrate between pathways over time, with 60 per cent of respondents saying they would be more likely to do this following an annual review.
That said, the existence of the Investment Pathways concept alone doesn’t solve the problematic lack of retirement planning, according to the study. Just 44 per cent of prospective drawdown customers say they will actually use the Investment Pathways. Inertia remains the biggest barrier to adoption, with 33 per cent of respondents saying they would not move from their default accumulation funds unless prompted.
Emma Douglas, Head of Defined Contribution at LGIM, says: “The positive reception to Investment Pathways is a promising first step in overcoming inertia at retirement and achieving greater engagement with non-advised members. The Investment Pathways go a long way in alleviating anxieties, in particular for non-advised savers who are yet to draw down.
“Digital tools can help bring the Pathways concept to life, extending beyond the four simple options to bringing about a greater understanding of the risk and reward of each solution. Our research found that members welcome more regular guidance when making decisions on their retirement, with 81 per cent feeling the current 5 year review is too infrequent. It is therefore important we keep in close contact with members during this stage of their retirement journey as they make decisions of how to spend their money.
“Done well, Investment Pathways should complement other industry initiatives such as the Pensions Dashboard and also pension consolidation, to give members a single view of their retirement investments and clear information about their options. In this way, we can turn the confidence boost that Investment Pathways deliver into meaningful action which delivers better retirement outcomes for savers.”
Jane Craig, Partner at NMG Consulting, says: “It’s great to see a much needed default solution for retirement income come to market. But it’s clear that the less engaged proportion of pension savers are going to need a really strong nudge to take notice and act – the greatest barrier to take-up is likely to be inertia.”
Dermot Courtier, Independent Chair of the L&G Mastertrust, says: “We are encouraged by the positive appetite from pre-retirees for more education and engagement as they commence and continue down their journey into retirement. The decisions made by individuals as they near retirement could have a significant impact on their finances, so it is incredibly important to ensure members are given the right options, especially to support investment decisions while in drawdown. It is therefore reassuring that the options available are meeting the majority of members’ expectations, further supporting our commitment to delivering the best outcomes for our members.”