10 July 08 – Publication of DWP research report: No 515 Information Needs at Retirement: Qualitative Research Focusing on Annuitisation Decisions
This report presents the findings from in-depth research on the decisions around retirement and pension fund annuitisation of individuals with defined-contribution (DC) pension funds who were either within a few months of retirement or who had recently taken out an annuity. The aim of the research was find out about the background, characteristics and attitudes of individuals, especially on their experiences and views of planning for retirement and the annuitisation process. In particular it focused on what levels of understanding people had about the choices they have for example around the use of the Open Market Option (OMO) and the role of information and advice in the decisions made.
The main findings are:
- The research revealed a number of problems and issues affecting retirement decision-making. These include a lack of awareness and misunderstandings around the annuitisation process, for example a common belief that using the Open Market Option would be complicated, time-consuming and not worth the effort. It also found complications introduced by annuitants’ personal circumstances, for example regarding tax or multiple pensions, and problems perceived to be due to providers, for example, lack of clear information;
- The main factors affecting the way in which participants coped with the annuitisation process were their degree of financial awareness and knowledge particularly about pensions and annuities, and their level of engagement with saving for retirement and the annuitisation process;
- Overall, awareness of the options to defer annuitisation and to take a cash lump sum was high, but awareness of the different types of annuity was lower, as was the level of understanding of how to exercise the Open Market Option and its potential advantages;
- For many of the less financially knowledgeable, the only source of information they recalled receiving about their annuitisation options was the printed information and letter from their pension provider setting out the background and decisions to be made, some four-six months before their expected retirement date (the so-called ‘wake-up’ letter). Many perceived this as over-complex and providing too much information to take in.
- A range of other factors contributed to the decision-making process, including individuals’ personal circumstances, such as the existence of multiple pensions, and complex tax scenarios; and established attitudes and patterns of behaviour, including a mistrust of providers and advisers, or conversely, in some cases, a sense of loyalty to providers
Notes for Editors
- “Information Needs at Retirement: Qualitative Research Focusing on Annuitisation Decisions” by Horack S., Watmough M., Wood A., and Downer K. RS Consulting Ltd. 2008 (DWP Research Report No. 515) is published on the DWP website at http://research.dwp.gov.uk/asd/asd5/rrs-index.asp
- The research was undertaken to provide a better understanding of the decisions faced by policy-holders of defined contribution (DC) pension schemes as annuitisation approaches, during a period when the number of DC schemes has been increasing and will continue to increase relative to the number of defined benefit (DB) schemes.
- Under current annuitisation rules, individuals can annuitise their DC pension at any time between the normal minimum pension age (currently 50 but increasing to 55 from April 2010) and age 75. Current rules also allow most DC pension fund holders to take up to 25 per cent of their pension fund as a tax-free lump sum at any time from the normal minimum pension age to the age of 75. Individual annuitants are able to buy the annuity from their current pension provider or an alternative provider through the open market option (OMO).
- Depth interviews, of around an hour, were carried out with 60 individuals, spread equally between ‘recent’ and ‘prospective’ annuitants and between occupational and personal pension holders. The Department secured the cooperation of a number of pension providers (six in all) to identify potential interviewees.
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