Sponsor’s comment: Employees must take advantage of flexibility in pension options

This article is suppled by Wealth at Work

Jonathon Watts-Lay, director of Wealth at Work, explains how staff must play a more proactive role in managing their future income requirements

In most cases, employees will purchase an annuity to provide them with an income in retirement. However, additional income flexibility supported by information and education may ultimately ensure that they achieve a greater income in retirement. For example, are employees made aware of the retirement income options available to them, including unsecured pension? Does the existing pension arrangement support such alternatives? And do employees have access to tools and advice that will help them determine the most competitive and appropriate income in retirement?

Increasingly, organisations are considering the range of savings vehicles that are made available to employees. Although a pension represents the core of an individual’s retirement savings strategy and is most likely to continue to do so, other opportunities may provide staff with savings flexibility and, indeed, encourage them to develop the savings habit.

For example, would access to an individual savings account (Isa) with a subscription limit of £10,200 help those seeking to save tax efficiently, yet retain access? Should HM Revenue and Customs-approved share schemes become an integral part of an employee’s savings, providing the importance of investment diversification is highlighted? And will a deposit account with a preferential rate of interest support those with a shorter investment time horizon, such as saving for a deposit to purchase property?

Engage and educate employees

Delivering the flexibility referred to above requires two main ingredients: the capability to deliver the various elements, and the need to engage and educate employees to ensure their opportunities are maximised.

Existing provision must be assessed to determine where enhancements can be made and whether additional flexibility can be delivered by existing providers. Achieving true flexibility depends on presenting contribution, income and new savings flexibility in a cohesive way where it is viewed by employees as a single benefit.

Simply providing access to additional flexibility will not be sufficient in itself; employees need to understand the value of flexibility and how it will assist them in securing their long-term financial wellbeing. Employees need to take ownership to manage the risk of ensuring savings are likely to meet future income requirements – a risk that is now theirs to manage.

More articles on: Special report 2010: Contract-based pension investment