Navigating decumulation decisions: Essential support for DC Members

Decumulation; what a horrible word! Its official meaning is “the disposal of something accumulated”. But in a pension context, arguably it’s simply spending the retirement savings we’ve made throughout our working lives. This might be when we stop working completely, move to shorter hours or decide to use some of our hard-earned savings to treat ourselves (or indeed others).

The decisions people make when they access their pension, initially and over time, will have enormous implications for the rest of their lives. But these decisions are hard – and circumstances change over time, whether due to family developments, changes in health or economic conditions (for example the recent cost of living crisis). And the risks of making the wrong decision are huge. 

Below, I’ve outlined just some of the scenarios that could, and indeed have, played out for retiring DC members:

•  Buying an annuity with no minimum term and dying two years later.

• Buying an annuity with no spouse’s pension because it looked too expensive and dying, leaving no financial security for their spouse.

• Taking the maximum tax-free cash out of their pension and putting it in the bank for the next 10 years because they don’t “trust” pensions - and then paying tax on the interest.

• Spending less than they could afford to as they’re worried about running out of money.

• Not being aware of Pension Credit if they retire with less than a certain level of income.

• Thinking the amount in their DC pension pot is their annual income rather than their total pension assets.

I could go on…….

Often, these situations have occurred when people have been left without the help and support they need when they retire. Don’t get me wrong, PensionWise is a valuable service and those who use it tend to feedback positively on it. But we know that, in spite of the stronger nudge to guidance we must now give DC members, only a small proportion of people use the service. This leaves the remainder effectively on their own to make one of the biggest decisions they’ll make in their lives. 

So, in my view, it’s incumbent on all of us to do as much as we can to help and support these people, both at the point of retirement and on an ongoing basis.

At our recent decumulation webinar, 43% of people who expressed an opinion said that they were not doing more to develop a decumulation solution at the current time because they were waiting for the new, well-trailed regulations (particularly in relation to trust-based schemes offering a “default” decumulation option). But with guidance around decumulation now being caught up with the Pensions Bill, it’s unlikely we’ll see anything from the Department of Work and Pensions or The Pensions Regulator for many months. As more pension scheme members come up to retirement with DC-only benefits, delaying decisions on member support will almost inevitably lead to a raft of members making poor decisions at retirement.

We’re working with a range of clients to help them explore their options and agree how best they can support their members both at and through retirement. These options include appointing a post-retirement master trust, working with SIPP providers to offer a more attractive solution for members, appointing a single (or panel of) IFAs or annuity brokers, and exploring the potential benefits of a post-retirement CDC solution. There’s no “one size fits all” but, in my view, any well researched solution is better than no support at all. 

Many providers now offer post-retirement solutions which come with some level of guidance or financial coaching. And we’ve seen several companies coming to the market who offer a more holistic and inclusive approach to financial well-being. This can help members think about their wider savings. Understanding what’s available, and importantly where any gaps may be, is vital to achieving better long-term retirement outcomes for all our pension scheme members.

To discuss this further, please do get in touch.