Figures published by HM Revenue and Customs (HMRC) have revealed that a record 336,000 individuals have taken £2.75bn out of their pensions in the second quarter of 2019. This represents a 21 percent increase from £2.27bn in Q2 2018. In total, more than £28bn has been withdrawn since the pension freedoms were introduced in 2015. Contributor Jonathan Watts-Lay, Director – WEALTH at work.
Whilst freedom and choice in pensions is popular with individuals, the downside is it can be easy for employees and pensions scheme members to make poor decisions which can create a permanent dent in their retirement income. For example, paying more tax than necessary, falling victim to a scammer or making ill-judged investment choices. To help avoid this, WEALTH at work, has outlined the top 5 considerations to help employees and members before accessing their pension.
1. Understanding the tax implications
Latest figures show that pensioners are paying £4billion a year more in income tax on their pension than what the government had previously estimated, indicating that individuals are often paying tax when it could be avoided with careful planning. In fact, our latest research* with the Pensions Management Institute indicates that Trustees have taxation fears for their member’s at-retirement, with eight out of ten (81 percent) believing that members are not equipped to deal with the taxation implications of accessing their pension. Our poll** of employers also found that 91 percent believe that employees do not understand the tax rules when withdrawing pension funds.
Ultimately, tax planning should be at the heart of any pension transaction. Many could find themselves paying more tax than they need to if they don’t plan carefully and will need support to understand how to do this.
2. Understanding how long retirement savings may need to last
Before accessing their retirement savings, it is crucial for employees and members to think about if they will have enough money to last the duration of their retirement. Research has found that most people live longer than expected, so this needs to be remembered when doing the sums. For example, the Institute for Fiscal Studies found 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. However, it’s no easy task working out how long your retirement saving will need to last and how to best achieve this, so support around this will be crucial.
3. Understanding the risks around DB pension transfers
Since the pension changes, we have seen a rise in individuals wanting to transfer their defined benefit (DB) pension schemes into defined contribution (DC) pensions to access the cash. According to Royal London, the total value of DB pension transfers has reached £60billion since 2016. Coupled with this, The Pensions Regulator has disclosed that 390,000 people had used pension freedoms to access their DB pots since 2016.
However, pension transfers are complex – there are many things to consider before making any decisions, including whether the transfer value being offered represents good value.
Regulated financial advice must be sought to transfer a DB final salary pension if its value is £30,000 or above. However, the FCA has warned that DB pension transfer advice is often substandard. Less than half of the transfer recommendations reviewed by the FCA last year were considered right for the customer. Caroline Rookes also carried out a review for the Pension Regulator on the communications and support given to British Steel Pension Scheme members, and found that members acted on an un-informed or ill-informed basis, were exposed to unscrupulous advisers and were swayed by the size of the transfer figures rather than the value of the benefit.
Rather than leaving employees and members to go it alone when sourcing a reputable adviser for DB transfers, many forward thinking employers and Trustees are now putting robust due diligence processes in place to ensure that individuals have access to advisory firms who have appropriate qualifications, an exemplary regulatory record and transparent and fair pricing.
4. The pension scam epidemic
Individuals getting scammed out of their retirement savings is a real issue. Our research* found that a vast majority of Trustees (88 percent) fear their members nearing retirement will face predatory attention from scammers.
The problem is many of these scams look perfectly legitimate so are not easy to spot. Others offer investment returns which are ‘too good to be true’ but people easily get sucked in. They often have very professional looking websites and literature. However, the amounts lost to pension scams can be significant with the FCA revealing that victims of pension fraud had lost £91,000 on average each, with some even losing more than £1 million to fraudsters. More needs to be done to highlight this risk to employers and members and how it can be avoided.
5. Do employees and members realise that regulated financial advice can be better value than no advice?
Many don’t realise that when they buy retirement products such as annuities, through for example online brokers, there are charges deducted which can cost just as much, if not more, than getting regulated financial advice. Studies have shown that those who take regulated financial advice are more likely to increase their wealth than those who do not. For example, the International Longevity Centre revealed that individuals age 45 and over who receive financial advice are on average £40,000 better off than those who don’t.
Jonathan Watts-Lay, Director, WEALTH at work, comments; “As we can see, whilst the pension freedoms offer a great deal of flexibility they also carry many pitfalls and risks. Many employers and Trustees are now seeing the benefits of putting robust processes in place to support their employees and member’s at-retirement. This includes offering employees and members access to financial education seminars and to one-to-one financial guidance over the telephone, in the months or even years before retirement, as well as facilitating an introduction to a regulated financial advice firm which has been through a thorough due diligence process. This should cover key aspects including the regulatory record of the advice firm, the qualifications of its advisers, its pricing structure and ideally a firm which is a workplace specialist. This approach should ensure an improved retirement process leading to better outcomes.”