Don’t trust the state if you want a rich retirement

What do you want from your pension when you come to start drawing on it? This is not a simple question. I’m not talking here about guaranteed defined benefit pensions. such as final salary schemes, but the defined contribution “pots of money” pensions on which many of us increasingly have to rely.

At retirement a host of variables can have a bearing on what you might choose to do with your savings. These include your health, your attitude to investment risk, your home ownership status, your non-pension savings, whether you’re stopping work abruptly or going part-time, your marital situation and those same factors for your partner, and so on. Recent changes to pension death taxes have further complicated the picture.

You could just take all your pension out in cash, although you may pay quite a lot of unnecessary tax if you do; you could use it to buy an annuity; or you could keep the money invested in your pension and draw down a regular income. You could, as many people do, use a combination of all three. Everyone needs to decide what is going to work best for them.

This challenge is in sharp contrast to the situation at the start of your working life, when a one-size-fits-all approach can work quite well. The auto-enrolment scheme can get millions into pensions, but it can’t get them out.

Before 2015 most of those approaching retirement had to use their pot to buy an annuity, which had the merit of simplicity but also meant shockingly poor value for money for millions of savers. George Osborne ripped up those rules in his budget of 2014.

He gave us freedom to choose how to use our own money but also left many struggling to decide what to do. Whatever choices you make require trade-offs against the uncertainties of how long you will live, future investment returns and increases in the cost of living.

Now the government has decided that this is all a bit too complicated for us to deal with. We already have a retirement guidance service called Pension Wise, which is free to use (funded by a levy on all pension savers) but apparently this isn’t enough. Under new legislation on its way through parliament, pension schemes will be required to set up a default retirement policy. This means that within a couple of years, if you don’t make an active choice over how to draw on your pension savings, your pension scheme will be obliged to make it for you and start paying you an income.

This is a terrible idea. Your pension scheme can only guess at a solution for you. Without information about all those personal variables affecting your circumstances, it can only deliver a homogenous “least worst” answer. It will be designed to minimise the risk of causing you any financial harm, or incurring the pension scheme any legal liabilities.

This is a failure of financial regulation. For ten years now, financial firms have been trying to guide customers through the retirement decision-making process. They have been hamstrung by the stifling hand of regulators that have been far more concerned with preventing a few bad outcomes, than facilitating many good ones.

My advice is, don’t leave it to chance, take the time to research your options at least a few years before you expect to draw on your pensions. Pay for advice if you think you need to, it will almost certainly be worth it; there are also some good guided planning tools out there, in spite of the best efforts of the regulators.

Tom McPhail is a pensions commentator with 20 years’ experience across the industry