Survey reveals shocking lack of pensions knowledge especially among older women

by Dr. Ros Altmann

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High proportion of pension savers have low levels of financial capability

Freedom and choice won’t work if people don’t understand pensions

Crucial role for ‘Pension wise’ guidance – supplemented by financial advice

 

Millions of older people – especially women – at risk of poor pensions:  The shocking results of a new research report published today show that millions of people are at significant risk of not making good use of their pension savings.  Despite possibly decades of pension saving, a Survey of people aged 50 to 70 shows that a high proportion of pension savers have astonishingly low levels of pensions knowledge.  The problem is particularly severe for women, most of whom simply don’t seem to understand even the most basic terms that are important when considering pension options. 

SURVEY RESULTS BY GENDER – OLDER WOMEN UNDERSTAND FAR LESS THAN OLDER MEN

 

How well do you understand the following financial term…:	Proportion who understand quite well/very well Men	Proportion who understand quite well /very well Women
Savings account	93%	83%
Mortgage	93%	82%
Pension	82%	68%
Tax Free Lump Sum	75%	54%
Annuity	54%	34%
Income drawdown	33%	17%
Joint-life annuity	32%	19%
Enhanced annuity	18%	9%
Marginal Tax Rate	24%	9%

The pensions industry has benefitted from customers who do not understand pension terms:  The Survey shows that it is pensions in particular that people are ignorant of – when it comes to savings accounts or mortgages over 80% of both men and women say they understand. The complexity of pensions and the failure of providers to educate or help customers understand the important elements of pensions has prevented customers from making informed decisions.  Many have saved for years in a default fund without having to make any decisions for themselves and were then forced into buying an annuity which they did not understand.  This suited the pension firms, but was not necessarily in customers’ best interests as such ‘one-size-fits-all’ approaches do not fit everyone.

Half of men, only a third of women understand the term ‘Annuity’:  Only just over half of men say they understand the term ‘annuity’ quite well or very well, and only a third of women think they do.

Joint-life annuity not understood by under a third of men, under a fifth of women:  Even more worrying, the level of knowledge of the different types of annuity that can be so important for people to understand, is even lower.  Less than a third of men and less than a fifth of women feel they know what a joint-life annuity is.  This is deeply worrying because a joint-life income can be crucial for couples to ensure that the widow or widower is not left penniless.

Enhanced annuities not understood by under a fifth of men and less than a tenth of women:  When it comes to enhanced annuities, only 18% of men and 9% of women knew what this meant.  An enhanced annuity can be the most important aspect of annuity purchase, since buying a standard annuity assumes the purchaser is in excellent health, whereas those who are not perfectly healthy can get a much better pension if they buy an enhanced, rather than standard annuity, so that their health is properly reflected.

Don’t understand tax implications of taking money out:  The Survey findings that very few people actually know what a marginal tax rate is, are also disconcerting.  People may not realise they could lose 40% or 45% on their pension withdrawals, but once they have taken the money out it is too late to go back.

Role of the ‘Pension wise’ guidance is vitally important:  People need to know more about pensions, to have someone help them understand the basic terms involved, so they can make informed decisions about what is best for themselves.  

Ideally, they will need financial advice that is independent and given by an expert:  For those who need individual hand-holding, advice is generally worth paying for to avoid making poor and irreversible decisions.  People are usually unaware that they will pay commission to buy a product even if they get no advice, whereas they may be better off spending that money on advice instead.

Special help needed for women:  It is important to bear in mind the exceptionally low level of financial capability of older women.  Financial education, information and guidance for women must be of sufficient quality to ensure everyone has a fair chance to make good decisions.

Pension freedoms can’t work properly if people don’t understand pensions:  Improving financial education and awareness among pension savers is so important.  Providing basic financial education and the ‘Pension wise’ service should be extended to all age groups as a requirement of pensions auto-enrolment.  This is a tremendous opportunity to empower people to manage their retirement income, rather than just being at the mercy of pension companies, but the risks of poorly informed consumers not understanding how to make the best choices must not be ignored.

ENDS
14 January 2015

Notes
Survey undertaken by YouGov. Total sample size was 5120 adults aged 50 to 70. The research was written up by ILC-UK, leading independent think-tank on longevity.  It has been supported by a consortium of industry partners (EY, Just Retirement, Key Retirement, LV= and Partnership) and guided by pensions and retirement expert, Ros Altmann.
You can link to the full research report here: Making the system fit for purpose, the report launched at the event, is available to download here:
http://www.ilcuk.org.uk/index.php/publications/publication_details/making_the_system_fit_for_purpose