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Six steps to help employees who are retiring in 2020

Jonathan Watts-Lay, Director - WEALTH at work

Encourage employees to put a retirement plan together – Before making any decisions about retirement, employees should put a plan together which considers how much income they will need in retirement to meet their day-to-day living expenses (household bills etc.), discretionary income (holidays, hobbies etc.) and how their income needs may change over time. They should then work out whether they have sufficient savings to meet their needs by looking at all their assets including all pensions, ISAs, shares and general savings and what they are all worth. Research has found that most people live longer than expected, so employees should keep this in mind when doing their sums. For example, the government estimates[1] that life expectancy in the UK for people aged 65 in 2016 to 2018, will be around 83.6 for men and around 86 for women.

Help employees understand their retirement income options – Employees who have a DC pension will need to decide how to access their income whether that is through income drawdown, buying an annuity or taking it as a cash lump sum or indeed a combination of these options. Yet our research with Employee Benefits[2] found that 74% of employers see uncertainty about how to make decisions when accessing pensions as a key concern for employees as they approach retirement.  Financial education, guidance and/or regulated financial advice can help employees understand exactly what each option means and which approach best suits their needs.

Ensure employees understand the tax rules – Do employees realise that typically, only the first 25% of a DC pension is tax free (calculations for DB schemes will differ) and that the remaining 75% is taxed as earned income? Employees could find themselves paying more tax than they need to if they don’t plan carefully.  For example, we polled over 70 employers in 2019[3] and found that 91% of them believe that employees do not understand the tax rules when withdrawing money from their pension. It is really important that employees take the time to understand these  rules as it may be possible to save significant amounts in tax.

Encourage employees to shop around – Employees should be encouraged to shop around before making any decisions about purchasing any retirement products. Which? [4] found in 2019 that shopping around for an annuity can increase an individual’s retirement income by 20%. However, the FCA[5] found that only 11% of pensions were accessed to purchase an annuity this year and an increasing number of people are accessing their pension through income drawdown. It is crucial that employees do as much research as possible to ensure they select a retirement option that best suits their needs. This means finding a solution that enables them to access the right amount of cash as and when they want it, and for as long as they need it.

Protect employees from scams – Scammers often use highly professional looking websites and marketing literature to lure individuals in, and they tend to sound completely legitimate. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken. Findings from the FCA and The Pensions Regulator[6] show that victims of pension scams could lose 22 years’ worth of savings within 24 hours. So, whatever employees are planning to do with their retirement savings, it’s really important that they understand the risk of scams and how to protect themselves. They can do this by checking whether any company that they’re planning to use is registered with the Financial Conduct Authority (FCA) https://register.fca.org.uk/ and they can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams www.fca.org.uk/scamsmart.

Promote the importance of regulated advice – Many people are concerned about the cost of regulated advice without realising that when they buy retirement products such as annuities, through for example online brokers, there are commissions to be paid which can cost just as much, if not more than getting advice. Employees should understand the importance of seeking regulated advice. After all, research from the International Longevity Centre[7] carried out in 2017 suggests that ‘affluent’ individuals who received advice accumulated on average £30,882 more in pension wealth than those who didn’t take advice. Regulated advice also provides the benefit of consumer protection for the advice given, as well as a retirement plan tailored to an individual’s needs. Jonathan Watts-Lay, Director at WEALTH at work, comments;

“The New Year is a great time for employees approaching retirement to have a good look at their plans and think about how they can make the most of their savings. But before any decisions are made at-retirement, employees really need to understand what their options are and the generic advantages and disadvantages of these, as well as considering any associated risks such as tax inefficiency, longevity, losing money to scams and ultimately running out of income sooner than expected.”

Watts-Lay continues; “Many workplaces now offer support to their employees in terms of financial education, guidance and regulated financial advice, so that employees are informed at-retirement and can make better choices which will lead to better outcomes for all.”

 

[1]https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/nationallifetablesunitedkingdom/2016to2018

[2] https://www.wealthatwork.co.uk/corporate/2019/11/26/employee-benefits-pensions-research-2019/

[3] https://www.wealthatwork.co.uk/mywealth/2019/03/04/91-of-employers-believe-employees-dont-understand-the-tax-rules-when-withdrawing-money-from-their-pension/

[4] https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/annuities/buying-an-annuity-atlc72m0g9j6

[5] https://www.fca.org.uk/data/retirement-income-market-data

[6] https://www.fca.org.uk/news/press-releases/22-years-pension-savings-gone-24-hours

[7] https://ilcuk.org.uk/new-research-finds-those-who-receive-financial-advice-are-on-average-40000-better-off-than-their-unadvised-peers/

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