32% of people using drawdown to fund their retirement have no investment experience, yet 41% of these have not received either financial advice or guidance, according to new research from Zurich UK.
Around 430,000 people are taking advantage of new pension freedoms to draw down their retirement savings, yet the highest proportion have never actively invested in the stock market. Despite being first-time investors, tens of thousands have not sought regulated financial advice or guidance, even though they have an average drawdown pot of £153,000.
The study – the largest of its kind into consumer behaviour in drawdown – warns that a lack of advice and guidance could leave retirees at risk of running out of money in retirement. Poor decisions in drawdown can lead to consumers taking on too much risk, missing investment growth or making unsustainably high withdrawals. Women in particular were more likely to be first-time investors, potentially putting them at greater financial risk (41% vs 29%).
According to Zurich, the ‘first-time investor gap’ is being driven by a lack of consumer understanding of drawdown, with almost half of novice investors who had not received advice saying they thought drawdown would be simple (47%). A further third (29%) claimed they were confident in their investment decisions, despite having no previous experience of actively investing.
Alistair Wilson, pensions specialist at Zurich, said: “As double the number of people choose drawdown over annuities, Britons clearly favour the freedom and flexibility, but the issue is that many appear to be underestimating its complexity. In the build-up to retirement, many savers rely on pension firms to make investment decisions on their behalf, meaning many have no hands-on investment experience when they take control of their pot.
“For retirees not getting advice or guidance, there is a danger they could end up picking the wrong investments or taking money out of their pot too quickly. This is putting a worrying number of people at risk of running out of money in retirement.
“Understanding what can be done to encourage consumers to seek financial advice or guidance is crucial to helping retirees secure a decent, lifelong income. The Government should reconsider the case for introducing mandatory guidance for drawdown, requiring people not getting regulated financial advice to opt either in or out of receiving guidance before accessing their pension. We would also like to see the new Single Financial Guidance Body offer free drawdown MOTs to help consumers not getting advice check they are on track in drawdown.”
The research also found that 10% of UK adults not getting advice rely on search engines to help them navigate the complexities of drawdown, while 20% look at newspapers and magazines. Pension firms were the leading source of guidance for 35% of consumers, though 44% of all those in drawdown confessed there is nothing that would prompt them to get advice or guidance.
The findings from Zurich UK follow the FCA’s review last month that found drawdown sales are now twice that of annuity sales. The FCA also revealed some consumers are not fully engaging with the guidance available from pension providers, potentially putting themselves at risk of poorer outcomes.