There has been much speculation about how much money employees will take from their pension pots since the decision to scrap compulsory annuitisation was made in the 2014 Budget last March.
The Chancellor announced that staff over the age of 55 with a defined contribution (DC) pension will be able to take all, or part, of their pension fund as a cash lump sum from April 2015.
In September 2014, actuary Hymans Robertson estimated that £5 billion will be taken out of pension funds in the three months after April 2015, of which £3 billion will be spent on luxuries such as new kitchens, conservatories and cars.
Although many staff will see access to their pension fund as a chance to spend, there is a serious side: how will it impact on their retirement plans over the longer term? Most staff do not have a financial adviser or access to affordable advice, so how will those approaching retirement know what to choose?
The government has made a commitment to provide pension guidance through its guidance guarantee, which will soon be rebranded. But delivering this will be a huge task, and it is hard to gauge just how successful it will be. Of course, some information and guidance is better than none, but will it be enough?
The new pension rules make it essential for staff to understand the choices they have and the implications of any actions they take. Many employees already seem to be taking action, with 50% of HR professionals having been asked for further financial guidance by employees, according to Secondsight’s white paper Is there a need for financial education in the workplace? published in October 2014.
Access to workplace financial education is key
The pension reforms will increase employee demand for access to financial guidance, which is why access to workplace financial education is becoming increasingly significant. Employers need to support their staff through this transitional period and be mindful of the fact that financial education is not about providing advice, it is about empowering employees to make their own financial decisions with their new-found knowledge.
Over a year ago, we predicted a shift towards employers needing to provide financial education programmes in the workplace. Employers are increasingly seeing it as an engagement tool: our white paper found that 51% of those that offer financial education do so because they believe it increases staff engagement.
Over the next few years, I think we will see more employers providing financial education on all aspects of financial life, not just pensions, as an added staff benefit.
Employers with established plans
Employers with established financial education strategies should ensure they appoint staff with relevant experience to manage these. They should also make sure that, as much as possible, delivery methods include face-to-face support. There is nothing better than talking to staff and conveying ideas and information in this more personal method.
Of course, topics need to be relevant to employers’ workforces, and need to be marketed professionally. There should also be a process to make employees aware of what they need to learn.
Ultimately, financial education is about changing employees’ perspectives on their financial lives and helping to give them the responsibility to manage their money. And given the likely turbulence that will ensue in 2015, it will have a key role to play both next year and beyond.
Darren Laverty is director of sales and marketing at Foster Denovo, parent company of Secondsight
