How guided retirement could work – and the pros and cons for your pension

Transitioning from ploughing as much as possible into a pension to working out the most efficient way to make it last when drawing an income in retirement can be tricky. Now the government has proposed a solution; guided retirement. But will it work?

Guided retirement would require workplace pension schemes to provide a default pension for savers approaching their post-work stage of life.

“After years of saving into a defined contribution pension, savers will have the option of a stable income for the rest of their lives, without having to become investment experts overnight,” the government said.

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The proposals are still being consulted on, so more detail will be released in due course. But based on what we know so far, what could guided retirement look like for those approaching retirement in the coming years and is it likely to leave retirees better or worse off?

What is guided retirement?

Guided retirement proposes the introduction of default pensions for life for the mass market that would remove the need for individuals to make complex decisions about how to turn their defined contribution savings pots into an income in retirement.

Under guided retirement, pension providers would have to design or identify default pensions that are appropriate for the needs and interests of the cohort they are intended to serve (they will not be individualised).

However the government recognises people approach retirement with differing circumstances, preferences, and levels of financial resilience, so default pensions would not be mandatory.

Instead they would sit within a broader range of support designed to ensure individuals who want to do something different with their retirement pot – like go into drawdown – can make choices that are best for them.

What could guided retirement mean for pension pots?

Default pension options would provide protection against the risk of running out of money in later life. These could involve annuities, collective pension arrangements or other approaches to managing withdrawals and longevity risk.

Becky O'Connor, head of pensions at PensionBee, explained: “The size of your pension pot doesn't change simply because you enter a default pension, but how it is invested and converted into an income could change significantly.”

Currently, when you retire, you're largely left to decide how to turn your savings into an income that lasts. You can take cash, buy an annuity, draw down as you go, or combine these options. Under guided retirement, your pension scheme would do some of that thinking for you.

“When you ask to access your pot, you'd be offered a ready-made option designed to provide an income throughout retirement. But the choice should remain yours: you can accept the suggested option or choose another way to use your savings,” O’Connor said.

What are the pros and cons of guided retirement?

Pros

The proposal has “some clear positives for pension savers and retirees”, said James Heal, director of public policy at St. James's Place: “It is clearly aiming to improve outcomes and recognises that longevity risk is a big issue for the defined contribution pension world.”

The benefits of guided retirement could be significant in terms of convenience, security and sparing people who genuinely find drawdown stressful the angst of not knowing if they are doing it right, agreed O’Connor.

This could help people avoid withdrawing too quickly or leaving too much saved in cash out of caution.

As Dilara Uyduran, chartered financial planner at financial planning service Hymans Robertson Personal Wealth, said: “It could make retirement simpler and potentially reduce the risk of people running out of money.”

Ultimately, though, the success of guided retirement will depend on getting the default pension options right.

“For years, one of the strongest messages to consumers has been not to simply accept the first annuity offered to them at retirement. The same principle applies here,” David Brooks, head of policy at Broadstone, said.

Cons

Default options would be built for each pension pot, so someone with multiple old pensions could find themselves in multiple different defaults – and it may be unclear whether these options align, O’Connor pointed out.

Another factor to consider is that with a collective scheme – one of the government’s proposed pension options for retirees, announced separately but as part of guided retirement – income isn't guaranteed. It could fall if investment performance or the scheme's financial position deteriorates.

Likewise once you’re inside a default pension, your provider may limit how freely you can take ad-hoc lump sums, “which is a real loss of flexibility compared with drawdown today, especially when life can take unexpected turns”, O’Connor said.

It will also be important to weigh up whether remaining in the default pension would help to grow the pot in addition to delivering a sustainable income. This, said O’Connor, “is particularly important for people retiring with smaller savings, who may need their remaining money to keep working hard throughout retirement”.

What could the impact be on your retirement and inheritance?

The impact of the proposed guided retirement changes on savers’ ability to pass unused pensions onto loved ones isn’t yet clear. If they work very similarly to annuities, these typically can’t be inherited.

A key concern, then, is the risk of irreversible decisions being made on behalf of individuals which could be unsuitable for them and their families, warned Heal.

For example, added Uyduran: “A more secure lifetime income could provide greater certainty in retirement, but there may be a trade-off between income security, flexibility and leaving pension wealth to loved ones.”

What if I’m close to retirement?

Those close to retirement shouldn’t worry. These proposals are about adding options rather than taking them away.

“Individuals who have clear plans, want to manage their own retirement strategy, purchase an annuity or pursue a different approach should continue to be able to do so,” said Brooks.

Pension freedoms remain in place, but more people should benefit from a structured pathway if they would prefer not to navigate retirement decisions alone, he added.

Is there anything I need to do?

There's no need to act on guided retirement yet. It’s a consultation, so details will change, and the earliest it could reach savers is 2029.

But if you're worried about making your pension last, there are a few things worth doing now, said O’Connor.

1. Track down any lost pension pots, check what they're worth, how much you're paying in fees, how those funds are currently invested and whether that’s in line with your investment goals and values – you can't plan a retirement income without knowing what you have and what the outlook is in terms of returns.
2. If you're aged 50 or over, book a free Pension Wise appointment through MoneyHelper. It's impartial guidance and a good way to understand your retirement options.
3. Finally, check your beneficiary nomination forms with your pension providers and ensure you have a will in place, and that these documents are up to date and aligned. These help your pension provider understand your wishes in respect of who should receive your money in the event of death, but they're easy to forget about.