Less than one in 10 will buy an annuity
Just 7% of people will still buy an annuity once new rules giving greater freedom over what people can do with their pension in retirement are introduced next year.
The figures, from an exclusive Moneywise.co.uk poll of 1,185 people, indicate that the majority of people (30%) would take their pension as cash when they retire, saving some and spending the rest.
Just over one in five (22%) will leave their pension fully invested for income, while 17% said they would consider a mix of all those options.
In his March Budget, chancellor George Osborne announced a revolutionary raft of measures designed to hand more control to pensioners. From April 2015, people who have saved into a money purchase or defined contribution pension scheme will no longer be forced to buy an annuity.
Instead, they will be able to take the whole lot as cash (subject to a tax charge equivalent to their marginal rate of tax), leave it invested, or purchase an annuity.
The government also announced that everyone who retires with a DC pension will be offered "free and impartial" face-to-face guidance at the point of retirement.
The latter policy could be crucial, as almost a quarter of people (24%) said they haven't a clue what they will do with their pension when they retire.
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.