Many people approaching retirement may be too confused to know how to use their pension pots to deliver a secure guaranteed income for life, a study suggests.
The International Longevity Centre UK found this was the case for the majority of people.
Its report entitled making the system fit for purpose suggested that consumers approaching retirement are "ill-equipped" for new pension freedoms.
The research, supported by a consortium of industry partners including EY, Just Retirement, Key Retirement, LV= and Partnership and guided by Dr Ros Altmann, incorporates a survey of 5,000 people aged 55-70 who are yet to retire or draw on their private pension wealth.
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The survey found:

While consumers want income security many are confused about options

• Only half those with a DC pension said they understood what an annuity is quite or very well.
• Only 20% of those with DC pots understood what an enhanced annuity was.
• And just 35% said they understood what income drawdown was.
• This compares to 9 out of 10 people who said they understood what a mortgage is.
• Women were consistently less financially aware than men on all measures and are therefore most at risk of confusion from the new pension freedoms

Guaranteed income seen as "most important"

• Nearly 70% of all those with DC pension savings favoured using their pot to deliver a guaranteed income, particularly an income protected against inflation, while just 7% said that paying for big ticket items such as holidays or a car was most important, and 5% said paying off debt was the priority.
Older consumers are risk averse
• Three quarters of people (75%) across the entire survey agreed with the statement "I would prefer a secure guaranteed income over an income that might rise or fall depending on financial markets".
• When asked what proportion of their pension fund they could afford to lose, the most common answer amongst those with DC pots was none (35%). Just 7% thought they could afford to lose 20% of their fund or more.

Compounding the problem of confusion, many are yet to make a plan

• Across the entire survey just 4 in 10 had made a plan. Those closer to retirement were more likely to have made a plan but even amongst those who were less than 1 year from retirement, more than 4 in 10 had still not made one.
• It is a similar story for those with DC pots, with 4 in 10 of those who are less than 1 year from retirement having not yet made a plan.
Lack of understanding could lead to artificially high tax burden
• Only 1 in 5 people with a DC pot said they understood what marginal tax rate was.
• When pressed on how to reduce their tax burden when withdrawing money from the pension pot, only half gave the correct answer that you should withdraw it in small amounts over a number of years. 1 in 10 wrongly thought that the best thing would be to withdraw as one big lump sum.    

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