Employees need to be made aware of all their financial options in preparing for retirement, says Jonathan Watts-Lay, director of Wealth at Work
In these challenging economic times, with the introduction of many new regulations such as pensions auto-enrolment, the removal of the default retirement age and enhanced options at retirement, employers and employees are often overwhelmed with the vast considerations which, critically, need to be understood.
Faced with problems such as insufficient retirement savings, over-indebtedness and a general lack of knowledge, employees have a pressing need for financial education in the workplace.
This is of special concern to those considering retirement. Employees save for many years to fund their retirement income but are often left without guidance at the point of retirement. This is especially important because the choice an individual makes at retirement is probably one of the biggest financial decisions they will ever make.
The end of fixed retirement dates will see many employees continue working longer, often opting for flexible retirement where pension income is supplemented by earnings from part-time work.
In the Wealth at Work Rethink retirement survey, published in July 2011, 67% of employers agreed that the removal of the default retirement age would see a significant number of employees choose to work for longer. This could be in order to enhance their retirement savings, which is an inevitable outcome given that the evidence suggests many are not saving enough for their retirement. Indeed, only 21% of employers believed their employees were saving enough for retirement.
For those not in a pension scheme already, auto-enrolment will be introduced from 2012. This should not be viewed by employees as a ‘pay cut’ but instead should be used to make essential provision to secure their long-term financial wellbeing. This is where financial education is paramount to convey the importance of saving for retirement.
Employees’ circumstances will vary, which is likely to result in different savings priorities. Pensions are likely to remain part of a longer-term savings strategy and share schemes a medium-term savings strategy, but the workplace individual savings account (Isa) can be a more flexible savings choice.
With the benefit of financial education, the integration of workplace savings, such as share schemes with pension and workplace Isa, can prove beneficial. For most employers, a workplace Isa is a fantastic benefit to offer, particularly if employees already have shares. For example, if the employee holds stock, they can wrap it into an Isa to protect it from further income tax and capital gains tax. Yet the cost of supplying the workplace Isa to the employer is nothing.
Creating value is especially important in the accumulation phase of saving that leads up to retirement - to build up the largest retirement pot possible.
Employees need to rethink their retirement now. Whether saving towards or taking an income to live in retirement, it is essential that employees receive financial education and suitable guidance in the workplace to understand their choices, what can be achieved and consequently make informed decisions. In these tough economic times, it is important to ensure value is being maximised from workplace savings, and financial education holds the key to releasing that value.
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