Expectations and experience of retirement in Defined Contribution pensions: a study of older people in England
Private pensions play an important role in the provision of income in retirement in the UK, although their role has evolved over time. While defined benefit (DB) pensions were prevalent in earlier decades, the importance of defined contribution pensions has been growing and will continue to increase in future years, especially for later cohorts. In particular, the introduction of auto-enrolment from 2012 is expected to increase pension coverage and the amount of pension wealth individuals accumulate before retirement, much of which is likely to be in DC schemes.
Much previous work has examined the accumulation phase of pension saving and how amounts of wealth accumulated in DC and DB pensions compare. Far less attention has been paid to the decumulation phase, which is the focus of this report.
How much income an individual gets from their defined contribution pension could depend just as much on the choices they make at the point of annuitisation as on their earlier contribution and investment decisions. Annuities are complex financial products and are unusual in the fact that individuals typically get only one shot at their purchase decision – once a particular DC pension fund has been used to purchase an annuity, the decision cannot be reversed. Therefore, even more than in the market for other financial products, individuals’ knowledge and understanding of the decisions they need to make will be crucial in determining their outcomes.
This report presents evidence drawn from household surveys about the knowledge, expectations and behaviour of DC pension holders in England during the last decade as they have approached retirement and purchased annuities. The evidence we describe here relates mainly to the group of individuals aged 50 and over, who will be reaching State Pension Age over the next 10–15 years.