Sample011 discusses how DC pension income amounts built up so far can be shown on dashboards.
DC incomes built up so far
Sample011
Only a small minority (c.10%) of people with DC pensions buy annuities these days.
The vast majority draw down their DC pension. We need to be helping members understand what is a sustainable rate at which to withdraw money from their DC pensions.
Luckily, in April 2018, the Institute and Faculty of Actuaries (IFoA) published a detailed policy briefing and associated media release on this topic.
IFoA had modelled what is a reasonable rate at which to draw down your DC pension pot in order for it to provide an income which is sustained throughout your retirement, i.e. without running out of money later in retirement.
IFoA’s recommendation is that people can sustainably withdraw 3½ per cent of their DC pension pot each year as a income from age 65 and not run out of money:
This is exactly the approach discussed on MoneySavingExpert (MSE) in April 2019 in an excellent blog article “How I built my own DIY pensions dashboard” by Steve Lodge:
“Forecasting the future pension [income] your DC funds might produce when you retire is like gazing into a crystal ball. While annual statements will include projections of your retirement income, these are often based on complex assumptions that may not prove realistic. A simple alternative calculation is to [multiply] the current value of your funds by the ‘safe withdrawal rate’ of 3.5%, or divide the total by about [28.5].”
Just like Steve at MSE, I think this is going to be the best way for dashboard users to think about what their DC pension(s) built up so far could mean in terms of an income from age 65.
Obviously, this ignores all future contributions and investment returns, and this would need to be made clear to dashboard users.
This shouldn’t be too problematical. In the 2018 Simpler Annual Statement research mentioned under Sample009, many research participants didn’t know whether or not the projected income on page 2 of the statement included future contributions. And many didn’t realise the DC pension was invested and would receive investment returns over time.
Moreover, DWP’s October 2020 research into people’s retirement planning, recommended that “given high levels of disinclination to engage with retirement planning or consider financial risks, and the tendency to focus on the present, information should focus on helping people easily bring together their combined pensions savings and the potential retirement income their [savings built up so far may] generate.”
Like everything else, this concept of showing 3½% of current DC fund values needs to be thoroughly tested with users.
As an example, this is what would be shown for my four DC pensions:
| Aon Master Trust | Aviva | Nest | Scottish Widows | |
| Approximate fund value (and statement date) | £66,000 (13 Aug 2021) | £335,000 (8 Jul 2021) | £14,000 (31 Mar 2021) | £1,145 (8 Mar 2021) |
| 3½% of this fund value (i.e. a proxy sustainable income from age 65) | £2,310 (a year) | £11,725 (a year) | £490 (a year) | £40 (a year) |
These DC pension income amounts built up so far are the final piece of the jigsaw.
On the final Sample dashboard (Sample012), I bring together all the previous discussions.