Is there too much risk in retirement?
Are UK savers facing too much risk in their journey to and through retirement? The shift from Defined Benefit (DB) to Defined Contribution (DC) has led to a wholesale transfer of risks to the individual saver. With the Pension Freedoms introduced in the UK, further risks have been added. Add to the mix the pandemic, inflation, the current cost of living crisis, and future impacts of climate change, it becomes clear that new approaches are needed to protect investors and help them manage such plethora of risks.
Risks for savers have increased dramatically; the risk of pension poverty for many is real and growing, as indicated by many studies and predictions.
Almost seven years after the Pension Freedoms act provided more choice to savers, there is an overwhelming body of evidence that this has not led to better outcomes for savers. In fact, behavioural factors alongside a lack of education have further worsened the odds for many to achieve a good, or even satisfactory, retirement.
There is a societal need for less risk and more protection in the savers’ retirement journey. Amongst the multitude of risks savers face, some unfortunately, such as lack of education and behavioural biases, will likely take a generation or more to address. Other risks, such as financial risk, can be reduced through product design today, with solutions having been around for many years.
Financial market risks are of major concern to the individual saver in the period to and through retirement. Traditional methods to de-risk pension portfolios as savers approach and move through retirement, such as shifting towards a fixed income heavy allocation, are in fact likely to create additional risks on the saver in the current economic environment. Banks are normally better equipped to provide protection against financial market risks than individuals.
Now more than ever it is important to focus on the risks that can be better mitigated today. Better retirement outcomes for savers can been achieved through protection tools like the Max Nav Product1 – a ready-made solution designed to provide both growth and protection. To improve outcomes for savers, more product solutions with hard downside protection should be made available.
While savers have been provided with many choices post Pension Freedoms, without the correct education and without more financial market protection in products when it’s needed, the risk of pension poverty is a real societal concern.
For an in-depth analysis of the current retirement savings market, the impacts of the switch to DC contributions and the role banks can play in reducing pensions risks, access our whitepaper “Is there too much risk in retirement?” For more information, contact us.