A ‘middle way’ between pension guidance and advice is likely to play an important role for a wider range of people than regulated advice is currently reaching, according to the Institute for Fiscal Studies (IFS).

The IFS’s Pension Review report set out potential policies that could help people manage defined contribution (DC) pension wealth through retirement, detailing the “huge amount” of variation in how people draw upon that wealth and in the range of financial risks faced in retirement.

It warned that managing wealth in retirement was difficult and policy design in this area was not straightforward, but change was required to help people make good decisions on drawing DC pension wealth.

Initial drawdown following by annuitising later in retirement was like to be a good solution for many, the IFS said, but the precise details of these kinds of products were “crucial”.

The government has suggested requiring trust-based pension schemes to offer default retirement income solutions, and the IFS said that efforts should be made to make these easy to opt out of.

“Given the substantial variation in people’s situations around retirement, some will be best served by deviating from the path of least resistance, and many will need help doing so,” the IFS stated.

“It should be as straightforward as possible to make such choices. Ideally, a menu of alternative options could be provided – as is often the case for people wanting to invest their private pension assets in ways other than the default asset allocations.”

To support people on deviating from this path of least resistance, the take up of advice or guidance, or a combination of the two, will need to rise, and a ‘middle way’ between them will likely be important for more people than regulated advice is reaching at present.

The IFS said this middle ground would be especially valuable if the government takes a less interventionist approach on how people can draw their pension wealth, but it would still be important if defaults were introduced.

Commenting on the report, Standard Life managing director for individual retirement, Claire Altman, said: “The retirement landscape has changed dramatically in the 10 years since pension freedoms and today’s reports recognise the fact that policy and product solutions are still playing catch-up.

"Those accessing their pensions have a great deal of flexibility and choice but they are also shouldering significant risks when it comes to making their savings last. These challenges mean that two fifths (41 per cent) of retirees will be at high or medium risk of making poor decisions.

“The report correctly identifies a lack of guaranteed income as one of the most significant challenges for retirees and we agree that blended approaches such as the ‘flex then fix’ model highlighted are part of the solution. Our own modelling shows that a combination of drawdown and annuities can offer an attractive combination of certainty as well as the potential for investment growth.

“As the government prepares to legislate for default retirement income solutions, the paper acknowledges that two of the key enablers are a reduction in the number of small pots and increased access to guidance and advice.

“Everyone’s retirement will look different so creating a system that enables people to seek support to maximise their income and one which gives them a comprehensive view of their total savings is critical.”

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