Bridging the decumulation advice gap in a DC-dominated retirement landscape

For decades, retirement planning in the UK has been heavily focused on accumulation – helping individuals build up their pension savings. As defined contribution (DC) pensions increasingly replace defined benefit (DB) schemes as the primary source of retirement income, the industry must confront a new reality: ensuring retirees can effectively manage their savings as they transition from accumulation to decumulation.

The shift represents a fundamental change in how retirees experience their financial lives. A significant advice gap exists, however. Rising regulatory burdens and the cost of financial advice have pushed guidance out of reach for many. As a result, a large portion of people in, or approaching, retirement lack the support they need to make informed decisions about how to invest and draw down their retirement savings.

Retirement industry stakeholders – including regulators, pension providers, and financial advisors – can take action to bridge this gap. By working together to expand access to guidance, develop new financial products, and enhance consumer education, the industry can help an ageing population navigate the complexities of decumulation with greater confidence.

Why decumulation matters

With DB schemes in decline, more retirees are entering retirement with a pot of DC savings rather than a guaranteed income stream. Over the next 5 to 10 years, as DC pensions become the primary retirement income source for most individuals, more retirees will be unprepared for the uncertainties around retirement spending.

According to the Invesco UK Retirement Study, recent retirees are significantly more likely to find that their retirement income falls short of expectations compared to those who retired under the DB system. Without the right guidance, individuals risk running out of money too soon or becoming overly cautious and underspending, ultimately reducing their quality of life.

Drivers of the advice gap

Converting a pot of assets into a stream of income to fund one’s retirement involves a host of complex decisions. Retirees must project how much after-tax income they need during a stage of life when their lifestyle and health care situation may be changing dramatically. On top of this, retirees need to determine how much to liquidate from their investment accounts and the most tax-efficient way to do so.

Unfortunately, many non-affluent UK workers or retirees don’t have access to the advice they need during this critical juncture. Several factors contribute to the widening advice gap:

• Cost of advice: Traditional financial advice services are expensive and increasingly out of reach for individuals with smaller pension pots.
• Regulatory burden: Consumer Duty regulations have led to increased compliance requirements, making it more costly for advisors to serve less wealthy clients.
• Misperceptions about advice: Some consumers avoid advice due to fear, distrust, or the belief that it is unnecessary.
• Late-stage engagement: Many individuals seek advice too late in their retirement journey. Advisors estimate that around 23% of clients come to them when it is already difficult to optimise their financial plans.¹

A sizeable share of financial advisory clients seek advice too late

Consumers’ reluctance to seek advice early is a significant challenge for the industry and policymakers.

The risks of navigating retirement alone

For those without financial advice, retirement can be a minefield. The study underscores how non-advised retirees are more likely to:

• Underestimate how much they need to retire comfortably.
• Fail to adjust their spending habits, either spending too quickly or remaining overly cautious due to fear of running out of money.
• Struggle to make informed tax decisions, often triggering unnecessary liabilities.
• Miss out on investment growth, with many resorting to the instant gratification of tax-free cash (TFC) rather than adopting structured approaches that help them withdraw income in a way that balances longevity, market risks, and spending needs.

 Suboptimal cash deployment for consumers who have taken tax-free cash

Hasty decisions about the use of TFC can undermine long-term retirement income 

Addressing the problem with targeted support

Closing the decumulation advice gap requires a multi-faceted approach that involves industry innovation, regulatory flexibility, and enhanced participant engagement. Potential solutions include:

• Expanding targeted support: Regulatory initiatives such as ‘Targeted Support’ could help consumers make better decisions without requiring full financial advice. That said, many advisors worry it may blur the lines between guidance and advice, indicating the need for clearer guardrails.
• Enhancing employer and master trust engagement: Workplace pension schemes and platforms can play a role in providing structured guidance and digital tools to help members make informed decisions.
• Innovating financial products: Product innovation has not kept up with changing regulations. Offering default retirement solutions that provide retirees with structured withdrawal strategies can help those unwilling or unable to seek full advice.
• Encouraging earlier engagement: Many individuals only begin to seek advice at retirement, at which point it may be too late to undo 30+ years of poor planning. The industry must find ways to encourage individuals to seek guidance early in their careers.

Collective action for better retirement outcomes

As the UK shifts toward a DC-dominated retirement system, the importance of accessible, effective guidance in decumulation cannot be overstated. The risks associated with traversing retirement alone are clear, and the industry’s stakeholders have a responsibility to provide individuals with the tools, education, and support they need to flourish in retirement.

To explore these insights further, please download the full UK Retirement Study 2024 and visit our retirement solutions insights page.