In April 2015, the government will introduce the most radical pension changes in almost 100 years.
From the age of 55, all staff will be able to access their entire defined contribution (DC) pension flexibly, whether taking it as a lump sum, buying an annuity, drawing down, or a combination of these options.
These wider freedoms may be quite rightly popular, but they mean more decisions will be needed at and before retirement. To ensure these are good decisions, the vast majority of employees will need support to understand their choices.
The impact of the changes should not be underestimated. Many employers and pension providers are working hard to adjust their communications, increase financial education and offer improved retirement income services. But there is no one-size-fits-all solution.
Employees who want to take their DC pensions will need to understand their options, review what is on offer across the market and decide what is best for them.
Growing need for support
Many employees will not feel capable of doing that without guidance and advice. The Employee Benefits/Close Brothers Pensions research 2014, published in November, found that 48% of employers recognised that staff would need guidance at retirement, and 60% said uncertainty about how to make the best decisions when accessing pension savings was the greatest challenge facing their staff.
On top of this, people are living longer, which means there could be 30 or more years of retirement to provide for. In the context of uncertain economic times, it is easy to see why more employees will need advice or be vulnerable to making poor decisions.
Poor decisions may mean they will pay more tax; but the worst decisions may mean that pension savings are lost, with staff unable to recoup capital or provide for their retirement.
It is clear that advice is crucial. Staff can find advisers in a number of ways: asking friends, family or colleagues, or searching the web. But many ask their employer, which is a natural step because employers arrange their pension, have paid their salary for many years and are trusted. Many employees will expect their employer to help.
Employers’ approach to advice
Employers tend to fall into one of five camps when it comes to recommending financial advice: they make no recommendation; they have a panel of financial advisers that they select formally or informally; they refer staff to their pension provider, unbiased.com or the Financial Conduct Authority’s registered list of advisers; they select a financial adviser; or they provide financial education and access to providers that offer advice or can recommend an adviser.
With greater debate around employer support for employees and helping them to find a suitable adviser, and in line with their duty of care, more employers are now considering how to respond.
The Employee Benefits/Close Brothers Pensions research 2014 found that almost 20% of organisations said the pension changes would force them to offer staff greater support at retirement, and more than 30% said they would provide access to one-to-one financial advice.
Adding this requirement to an existing provider selection process need not be onerous. For example, when reviewing an existing financial education provider or pension provider, adding in financial advice as one more area of review should be a simple step for employers.
The landscape is changing and employers, advisers, pension and investment providers are having to adapt. Employees will naturally look to their employer for guidance and direction to find suitable advice.
Employers can respond to this in a number of ways, as they do now. But as the number of employees asking for help increases, the one thing employers can be certain of is that this issue is not going to disappear. Ignoring it and hoping it will go away is not an option.
Jeanette Makings is head of financial education services at Close Brothers
