According to the Pensions Policy Institute (PPI), around 10% of people are likely to make expensive mistakes when it comes to making decisions over their retirement income.
The PPI’s study shows that around one in ten people who are due to retire over the next few years could end up losing about 20% of their possible retirement income by making incorrect choices or following bad financial advice.
Complicated pension choices have made around 700,000 at risk of losing thousands of pounds by not fully understanding their options and the effects it will have on their retirement income
The PPI said that those who paid into a defined contribution pension scheme should ideal have good knowledge of how stock exchanges work and how the economy is faring. In addition they will need to understand how inflation will affect their investment and how long their retirement income will need to last.
Those who have poor numeracy skills are the least likely to get the most out of their pension investments say the PPI.
The institute expects the situation to become worse as the new pension freedom reforms come into effect in April 2015.
Currently, anyone with a defined contribution pension over the age of 55 must either purchase an annuity – where they will receive a guaranteed income for life, or have a drawdown – where they take an income each year from their pension pot and then leave the rest of the fund invested.
From next April, people will be able to access their pension funds like a bank account, but there are real concerns that many will make poor decisions with their funds, or be liable for large tax bills.
Some of the more common mistakes people make regarding their retirement income is to purchase the wrong type of annuity. Those who suffer ill health or have bad lifestyle habits such as smoking or heavy drinking should look at taking out an enhanced annuity product which will provide better pay outs than a normal annuity.
In addition, people who are married or in a civil partnership should ensure that they don’t accidentally take out a single life annuity, which if they died first their spouse or partner would no longer have a claim to the retirement income.
The new pension freedom reforms are likely to attract many bogus companies and scammers who will offer all kinds of investments to pensioners that don’t deliver, potentially taking a person’s life savings.
The PPI have found that those most at risk of losing some of their retirement income through bad financial choices are those with smaller pension pots of around £20,000 to £50,000 who have defined contribution pensions.
These people are statistically less likely to pay for independent financial advice, and also more likely to accept the first offer given to them for an annuity by their pension provider, rather than shop around for the best deal for them.
The PPI is urging people to spend a long time researching their retirement income options, taking into account how long they realistically think they may live for and how well they think they could invest their pension money themselves against getting a guaranteed income for life.
Whilst the Government is launching a guidance service in conjunction with Citizens’ Advice and the Pension Advisory Service, the advice given will only be a broad overview of the choices available and will not be tailored to the individual.