Jonathan Watts-Lay: Three steps to greater pension flexibility

This article has been supplied by Wealth at Work.

Jonathan Watts-Lay

The 2014 Budget changed the face of retirement options for members of defined contribution (DC) pension schemes, with perhaps the most radical pension proposals of our lifetime.

The changes will come into force from April 2015, removing many restrictions on how pension benefits can be taken from age 55.

But as April fast approaches, many employers are not prepared for the new world of choice on how to generate income in retirement. And it is not just about pensions; all savings, including individual savings accounts (Isas), should be taken into account if retirement income is to be considered properly.

This greater flexibility to decide how to take income is fantastic news, but without the right financial education and advice, employees could be left incredibly vulnerable to making poor decisions.

On 6 April 2015, many employers may be anticipating a huge number of staff enquiries about how to access current and deferred pension funds.

Although the government’s guidance guarantee will be available, it is open to question whether it will help to avoid taxation issues and the limitations of the new annual allowance, or aid employees’ understanding of their existing defined benefit (DB) or DC pension scheme rules in order to make good decisions on their next steps. In any event, the guarantee may be too little, too late.

Three key questions

In the years leading up to retirement, at the point of retirement and beyond, employees will typically have three key questions.

Firstly, they will ask what they need to know. For example, what are their options for drawing down their pension when they reach the age of 55? 

Financial education is key, because it will help employees understand the pros and cons of all the options available. Interestingly, many employers are putting financial education programmes in place for employees from age 45 to ensure they understand the options and have plenty of time to plan their eventual retirement.

Secondly, employees will ask which options are right for them. 

Their decisions will have many implications, ranging from the tax they will pay on withdrawals through to considering other pensions and savings and, potentially, those of a partner.

If they are retiring, it is important for them to understand whether drawdown, annuity or a combination of the two are the most appropriate courses of action. Therefore, individual guidance and support is important and should include both helpdesk support and fully regulated advice.

Of course, staff considering transferring a DB pension to a DC scheme in order to have control over their pot will have to obtain regulated advice, which is a stipulation of the proposed rules.

Action plan

Finally, staff will ask how they can create an action plan and implement their decisions.

Employees will need to manage their retirement income in line with their requirements, whether that involves leaving their pension alone for a while and taking income from another source, such as Isas, or taking some form of drawdown, buying an annuity, or a combination of options.

Many employees may want to make a series of decisions over time, rather than a single choice at retirement. Employers therefore need to consider which services they will make available to ensure employees can execute their chosen options.

Jonathan Watts-Lay is a director at Wealth at Work