UK DC schemes urged to offer more pension choices at retirement

Only 11 per cent of UK defined contribution (DC) pension schemes offer members a full suite of options to access funds at retirement, despite this delivering the best outcome for members, research from XPS Group has found.

As reported by our sister title, Pensions Age, XPS's DC Member Outcomes Report revealed that members with access to a full range of flexibilities at retirement, including access to flexible drawdown, a cash lump sum or an annuity, are more likely to make choices that allow them to maximise the funds that they can access.

It also found that over a third (38 per cent) of members who went through a pension scam identification interview said that the reason they transferred their DC benefits was because their scheme did not offer full flexibilities, whilst 21 per cent blamed a lack of investment options.

Indeed, the research suggested that a lack of choice can cause more scheme members to make choices that could result in an “unnecessary and premature erosion” of their savings as a result of high fees.

In particular, it found that 66 per cent of members are choosing to transfer to their pension to an alternative product, with 76 per cent of these switching to self-invested pension plans (SIPP).

The group warned, however, that whilst a SIPP may be suitable for some retirees, for others the additional charges could result in them running out of funds eight years earlier than would have had they chosen a low-cost receiving vehicle such as a master trust.

Scams also remained a concern, as 61 per cent of transfers from DC pension scams showed at least one warning sign of scam activity, representing a 79 per cent increase on the previous five years.

In addition to this, there was a 320 per cent rise in cases where the scam flag related to an unauthorised IFA giving advice on the transfer, with 21 per cent of transfers flagged for this reason.

The group also raised concerns over those retirees not taking action, noting that a “significant pool” of retirement savings remained untouched, with the research suggesting that these savers could lose over 10 per cent of their potential income over a 10-year period due to being invested in inappropriate assets.

XPS Pensions Group head of DC, Sophia Singleton, commented: “It’s crucial that everyone involved in the administration of a DC scheme is considering how to maximise outcomes for members, so offering the full range of choice at retirement is vital if members are to get the most value out of their savings.

“Schemes should also put in place systems to not only educate their members about how to make good decisions, but also to protect them from scams.

“For those who leave their pension pots untouched beyond retirement, current investment strategies should be reviewed to ensure that they’re suitable for that individual member’s goals.

"With £1.25bn in benefits now being paid out of DC trust-based schemes every year, these are issues that need addressing now.”

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