Everyone prepares for retirement differently, with attitudes ranging from complete denial to detailed planning. But although every response is unique, there are seven overarching pension personality types, says one of Britain’s largest workplace pensions providers.
People’s Partnership, which manages the pensions of one in five UK workers, in collaboration with State Street Global Advisers, has conducted in-depth interviews with groups of savers since 2015 and tracked their progress through retirement.
Seven clear traits emerged, each with their own advantages and pitfalls.
So which one most reflects your approach to retirement? And what will it mean for your own lifestyle when it comes to giving up work? Wealth investigates…
1. Procrastinating Pete and Paula
Procrastinating Pete and Paula is the most common personality type, according to the People’s Partnership.
This couple understands the importance of making the right choices about their pensions, but have little understanding of how they work.
Although they try to learn, the pension system is so complex and littered with jargon that they struggle to make decisions they feel confident about.
Tim Gosling, head of policy at People’s Partnership, says: ‘Pete and Paula were completely overwhelmed by the information when they approached their retirement.’
Janette Weir, director at Ignition House, a research consultancy that conducted the report for the pension provider, adds: ‘With no urgent need to access their money they will continue their search for many months, looking for some sort of holy grail that will provide the single solution to all their needs.’
People’s Partnership found that Procrastinating Petes and Paulas are so desperate to do the right thing that they follow the most common path, even if it is not right for them.
That means they are susceptible to taking their 25 per cent tax-free lump sum from their pension without having a plan for what to do with it.
Putting the lump sum in a savings account means Pete and Paula are likely to miss out on the compounding investment returns they would have enjoyed had they left the money in their pension until they needed it. This could cost them almost £3,000 a year in retirement income if they retired with a pension worth £200,000, Gosling estimates.
Before taking their tax-free lump sum out in one go, people with this personality should ask themselves whether they need the money. If not, they will most likely be better off leaving it invested.
Anyone struggling with plans for retirement can speak to Pension Wise, the Government’s free pension advice service (moneyhelper.org.uk).
Biggest pitfall: Needlessly taking their 25 per cent tax-free cash.
2. I-can-do-better Colin and Clare
Have you lost faith in pensions and the whole industry? If so, you might be an I-Can-Do-Better Colin and Clare.
This group has seen too many bad news stories about providers misplacing pensions or generating poor returns and the Government shifting goal posts. They believe pensions are overly complex, opaque and poor value for money, according to People’s Partnership.
Weir says: ‘Although they rarely have any idea what their pension is invested in, or indeed how it has performed compared to alternatives, Colins and Clares believe they can do better if they take their pot and invest it in something they can understand and control.’
Most people in this category have no investment experience, so favour cash Isas and high-interest savings accounts.
Putting money into cash Isas is not necessarily a bad move, but is unlikely to be the best strategy for those with a longer time horizon
‘They feel reassured that they know how savings accounts and cash Isas work, whereas pensions feel like a black box,’ Weir adds.
Putting money into cash Isas is not necessarily a bad move, but is unlikely to be the best strategy for those with a longer time horizon.
If they do move their pension savings into an Isa, Colin and Clare need a punchy 11 per cent return in order to make up for the tax bill, People’s Partnership says.
Pension withdrawals attract income tax at your marginal rate.
This means they will need to do 3.65 percentage points a year better than a professional investor, according to Gosling.
Some Colins and Clares are hobbyist investors and have accounts on one of the major stocks and shares platforms. However, they will not always have a well-diversified portfolio and as a result are likely to be taking too much risk.
Weir says: ‘We have observed some investing significant sums into eclectic or popular investments, such as eco hotels, or a limited number of well-known blue chip companies.’
This group is also more at risk of scams, as they manage their pension themselves.
Biggest pitfalls: Generating big tax bills by saving for retirement outside of pensions or taking the money out of pensions in favour of Isas. Missing out on higher returns. Heightened risk of scams.
3. Buy-to-Let Brian and Barbara
This cohort is convinced that you can’t go wrong with property.
Brians and Barbaras have lost faith in pensions and want their money in an investment they can control, according to the report.
In theory, a property investment can yield a good rental income each year and the value of the home can increase over time.
‘These are invariably the reasons given by the Brians and Barbaras for their decision, but they have rarely gone any further than this in their thought process,’ Weir says.
In theory, a property investment can yield a good rental income each year and the value of the home can increase over time
She adds they have rarely considered the fixed costs involved in the property purchase, such as stamp duty and solicitor’s fees, nor the common ongoing costs, including void periods, legal fees for tenancy agreements, mortgage interest costs, wear and tear repairs, insurance, letting fees and so on.
‘Brians and Barbaras have buried their head in the sand about the fact that their asset is not necessarily easy to sell and that capital gains tax when they do may erode profits,’ Weir adds.
These pensioners may have done well at first, but with higher interest rates on their interest-only mortgage, their costs are up and their yield down by just over a fifth, Gosling says.
They are also very exposed if anything goes wrong with the property or the wider market. They may also face a tax bill if they take savings from their pension to purchase a buy-to-let.
Biggest pitfalls: They are not diversified and could face large tax bills.
4. Spend-it Simon and Sally
Still working and living their lives to the full in their 50s and 60s are the Spend-It Simons and Sallys.
They access their pension pot as soon as they are permitted from the age of 55.
They want to enjoy it now – usually by spending some tax-free cash or a small pension on holidays, home improvements, a new car or a family treat.
However, they are simultaneously worried they will not have enough money to retire.
This group doesn’t usually have any plans to access the rest of their pension yet. Most Simons and Sallys have savings that they could spend instead of tapping into their pensions, but are reluctant to. Gosling says: ‘Somehow, the pension feels like free money.’
Spend-It Simons and Sallys access their pension pot as soon as they are permitted from the age of 55 and usually spend it on holidays, a new car or a family treat
If Simons and Sallys left their 25 per cent tax-free cash invested instead, they would have an extra £3,000 a year in retirement income thanks to investment returns.
The biggest risk this group faces is running out of money. Taking small amounts today may not seem detrimental, but it can make a big difference in the long run.
This group also risks triggering a little-known pension tax rule, called the money purchase annual allowance. If you withdraw even a single penny of taxable money from your pension, the amount that you can subsequently pay into a pension and earn tax relief drops from £60,000 to £10,000 a year.
Triggering this rule may mean Simons and Sallys find themselves unable to save as much as they had planned into their pension during the last few crucial years before they retire.
Weir says: ‘Simons and Sallys are focused on their tax-free cash and rarely spend time thinking about the remainder of their pot. Very few shopped around or considered whether or not their existing pension is offering value for money, or whether their investment mix is still appropriate.’
Biggest pitfalls: Running out of money in retirement. Leaving their remaining pension savings in a poor-value account.
5. Winding-Down William and Wendy
This group wants to enjoy life while they are fit and able, and have reduced their working hours to two or three days a week.
Williams and Wendys have started to draw from their pension to make up for the lost income. They did not expect their pension to last for life – they are simply looking to top up income for as long as possible, or to fill a gap until another source of income, such as the state pension, kicks in.
Weir says: ‘Wendys feel cheated that their plans for retirement have been disrupted by the increase to state pension age, and are using their pension pots to fund the difference.’
Many will find that they will need to work later into retirement to make ends meet.
Gosling, using figures from a £200,000 pension pot, says: ‘Based on the average age where people start encountering serious health problems, we think Williams and Wendys could have had to wind down further in their early 60s.
‘As a result, they could end up taking £10,500 a year from their pots before they start receiving the state pension. Because of this staggered approach, they might typically each have £14,000 a year to live on from 66.’
Biggest pitfalls: Being left with just the state pension to live on. Missing out on pension contributions in final years before retiring.
6. Help-Me Harry and Helen
Pensions are very important to Help-Me Harrys and Helens, who are determined to make the right decisions.
They have done their research, read articles and had a conversation about their options with their pension provider.
They are also the most likely to have taken up help from the Government’s Pension Wise service.
But they know their limitations – and conclude that they will need a financial adviser.
Weir says: ‘Some get to this stage very quickly; others will reach this stage after many hours of individual research.
The main downside is that the initial cost of financial advice can significantly deplete the starting value of smaller pension pots
‘Unlike other groups, Harrys and Helens see the value in financial advice, despite the cost. They are comforted that the research they have done at least enables them to ask the right questions to the adviser.’
The main downside is that the initial cost of advice can significantly deplete the starting value of smaller pension pots. Many may find they can’t keep it up, as most advisers will make an annual charge between 0.5 and 1 per cent of their pot.
They could also find that due to their small pension sizes, advisers may not be particularly keen to take on their business.
Gosling says: ‘Harry and Helen’s choice of an adviser has been expensive, due to the ongoing charge on their fund, but they have avoided the pitfalls of many of the first wave to make use of the pension freedoms and have a healthy private income.’
Biggest pitfall: Paying a high price for advice.
7. Secure Sue and Stan
Risk is the enemy for Secure Sues and Stans. They are more than willing to sacrifice flexibility for the security of a known income for life.
Gosling says: ‘They say that they have made sacrifices over the years to accumulate their pot and would be extremely unhappy to see its value fall. They are unsettled by stock market volatility and say they would constantly worry about their money if they held investments in retirement.’
They therefore start their retirement with the intention of buying an annuity.
But those who take a DIY approach to buying one risk being enticed by the higher starting income of a flat-rate annuity, which pays out the same income for life, instead of an index-linked annuity, which rises each year by a certain amount. This means their spending power could take a major blow during years of high inflation.
Gosling says: ‘Sue and Stan’s level annuity has given stability, but its value has been sharply eroded by the burst of inflation that followed Covid and the Russian invasion of Ukraine.
‘This means their level annuity has lost 25 per cent of its buying power. An increasing proportion of their household income – 60 per cent – comes from the state pension, which is inflation-protected.’
They may also be missing out on a more flexible approach that would still give them the security they seek.
By using a portion of their pension to buy an annuity, rather than use the entire pot, they may be able to generate an income that covers their daily expenses, while keeping a separate pension pot to the side that they can dip into when they please.
Any money they don’t spend can then be passed on to their loved ones after death.
Biggest pitfalls: Having no protection against inflation. Foregoing flexibility in retirement.
What is your pension personality type? Let me know at jessica.beard@mailonsunday.co.uk