The New Year is the perfect time for employees to take stock of their finances and those who are approaching retirement will have a number of decisions to make given the freedom and choice in pensions. Many will turn to their workplace for support with this. Here is a list of six steps employers can take to help employees who are retiring in 2019. Contributor 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.), and discretionary income for 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 Institute for Fiscal Studies[1] found this year that those in their 50s and 60s underestimate their chances of survival to age 75 by around 20 percent and to 85 by around 5 percent to 10 percent.
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. Yet our survey[2] found that only 22 percent of employers believe their employees understand all of the retirement income options available at-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 percent of a DC pension is tax free (calculations for DB schemes will differ) and that the remaining 75 percent is taxed as earned income? Employees could find themselves paying more tax than they need to if they don’t plan carefully. For example, latest industry research[3] found that more than a quarter (27 percent) of individuals over the age of 55 do not realise that they have to pay tax on pensions savings if they take the money as cash. Also, research by the Pensions Policy Institute[4] found that individuals could end up paying 200 times more tax depending on the way they decide to access their retirement income.
Encourage employees to shop around
Employees should be encouraged to shop around before making any decisions about purchasing any retirement products. The FCA[5] found this year that those who go into income drawdown could increase their annual income by 13 percent by switching from a higher cost provider to a lower cost provider. 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. The Pensions Administration Standards Association estimated last year that pension savers have lost more than £1 billion to scams[6]. 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 receive advice are on average £30,882 better off when it comes to pension income than those who don’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.
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.
Many workplaces now offer support to their employees in terms of financial education, guidance and regulated advice, so that employees are informed at-retirement and can make better choices which will lead to better outcomes for all.
