Changes are needed to improve access to high-quality, sustainable retirement income solutions as the UK’s pension system continues to evolve, the Investment Association (IA) has said.

In its paper Investing for a Better Retirement, the IA outlined four key recommendations and a series of principles designed to improve access to high-quality, sustainable retirement income solutions.

Under these principles, it said that solutions should be flexible, protect against inflation, are tax efficient, future proof and offer good value for money (VFM).

The association acknowledged that retirees face a “challenging environment”, shaped by inflationary pressures, evolving individual needs, and "exciting but complex" decisions over how to use income from their accumulated pension savings.

With so many options available to savers, the association said it is “vital” that people are supported in making informed retirement decisions.

While there is evidence that more individuals may engage with advice as they access their DC pension, the IA estimates that around 10 million DC savers may still access their pensions without professional guidance.

It explained that currently, savers turn to a wide range of sources for retirement information, but almost 30 per cent of non-advised individuals don't actively seek any information at all, underlining the need for a mechanism to support these people.

To help both advised and non-advised investors enhance the benefits of pension freedoms, the IA put forward four key recommendations.

The IA backed plans to develop targeted support, arguing that for those accumulating DC pension, targeted support would be "critical" in helping individuals make better retirement decisions, particularly those not accessing regulated financial advice.

For those opting out of targeted support, the IA recommended establishing a backstop solution that provides a baseline retirement income.

The IA also advocated for improvements in the retirement advice market.

In terms of how this would be done, the association said advisers should be encouraged to consider a client’s attitude to risk and capacity for loss in retirement, focusing on income stability and inflation protection, with the key objective of delivering retirement income.

It also called for the development of risk metrics that align more closely with retirement income objectives.

The IA proposed ensuring VFM in retirement, by making sure the retirement income market embeds a stronger value mindset.

If the upcoming VFM framework is extended to retirement income, the IA argued it should focus on income-focused performance and value metrics.

The final recommendation was to reform the rules governing UK-authorised funds to allow greater flexibility and better enable investment managers to deliver retirement-income oriented products.

Specifically, it suggested permitting funds to distribute capital to supplement income and retain income across accounting periods, which could help smooth out payments to investors.

Additionally, it said that it should ensure that retail distribution rules support the delivery of retirement income-focused investment strategies, permitting the use of a broad investment toolkit.

The IA stated that investment managers should facilitate the role of private assets in portfolios to and through retirement.

IA senior policy adviser, Imran Razvi, said that 10 years after their introduction, the pension freedoms continue to offer DC pension savers the ability to tailor the use of their pension wealth to their retirement goals.

However, Razvi pointed out that the same freedom means these individuals face a “complex series of choices” over how to generate income.

“As more people retire increasingly reliant on DC wealth, the need for informed, long-term planning and support has never been greater,” Razvi said.

“Ensuring people – whether advised or non-advised – have access to appropriate support and flexible, value-for-money retirement income solutions, is paramount.

“Our recommendations underscore that retirement isn’t a one-size-fits-all journey - and today’s savers need the tools, support, and investment options to match that reality.”

He said the financial services industry “must work collectively” to build stronger engagement with retirement planning, deliver more consistent support, and implement “smarter” regulation to empower the industry to deliver better outcomes for UK savers.

Adding to this, IA Retirement Income Committee chair, Richard Parkin, said: “We are moving rapidly towards the point where the income generated from savings will be the mainstay for people’s income in retirement.

“This increases the importance of consumers being able to access retirement options that generate durable, stable and growing income.”

Parkin noted that invested solutions have a “key role to play in this”, by offering the opportunity to improve retirement outcomes while retaining flexibility in the face of changing client needs.

He said that to support this, the industry needs to reframe how it thinks about risk in retirement away from volatility of capital towards the variability of income, stating that the two concepts are related but very different.

“Alongside this, in order to allow investment funds to distribute income more effectively and efficiently, changes will need to be made to regulation and tax laws,” Parkin continued.

“In particular, the restriction on distributing capital to supplement income and the requirement to distribute all income earned make it difficult for funds to deliver the stable and growing income consumers will need.”

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