Matt Thomas, Investment Management Advisory Partner at KPMGThe freedom to access pension savings at the point of retirement is hugely significant. For the wealthy it represents a tremendous opportunity to think anew about what part a pension policy will play over the course of retirement – whether it remains the main source of income or is kept in reserve for later years.
For the rest of the population, the reforms represent a minefield. The harsh truth is that most defined contribution pension pots are dismally small – underfunded by a massive 90 percent.
For many, taking the whole pot at the point of retirement and relying on the state pension for month-to-month income will be a huge temptation – perhaps even the only realistic scenario. We may see individuals ramping up debt just ahead of their retirement and paying it off once they can access their pension fund. This would put the state pension under tremendous pressure.
But before we reach this doomsday scenario it is worth bearing in mind that these reforms are likely to prompt individuals to think about their pensions earlier. I think we can assume there will be a lot of government PR around this. We need that, along with low-cost, meaningful sources of advice.
More significantly, we need to rethink what retirement means. The retirement of the future will be a journey, not an event. The underfunding issue is likely to lead not just to people delaying their retirement but dipping in and out, and going back to work as the need or desire arises. Pensioner poverty rates are set to increase massively, and the most common response to that scenario will be to return to work – assuming suitable work is available.
Providers will need to address the issue of lifestyling. Tomorrow’s retirees may want to pay into their scheme post retirement and defer any de-risking until later. And annuitising the pension pot mid retirement could also become attractive, as well as having a huge impact on the costs – and ultimately returns – for the pension holder.
Matt Thomas is Investment Management Advisory Partner at KPMG.