Jonathan Watts-Lay: Staff must make right choices at retirement

Understanding retirement income options is critical for any organisation running a defined contribution (DC) pension plan.

Many people are living longer, which is great news. But, with the removal of many defined benefit (DB) schemes in favour of DC, the onus is now on employees to consider their pension contributions, monitor their pension savings and, of course, choose the most appropriate retirement income option.

These decisions are very important to ensure people have sufficient income in retirement. However, many employees are left without any guidance at the point of retirement, just when they really need it.

Choosing the most suitable retirement income option at retirement is probably one of the biggest financial decisions anyone will ever make and a wrong choice could have devastating consequences for their personal finances in retirement.

Pension expert Ros Altmann commented on this at a ‘Retirement challenges’ event held by Wealth at Work in London in April. She said: “Because most workers don’t know how to assess their income options by themselves, far too many end up making the wrong decisions. They need help and advice; somebody to talk through financial reality with them.”

It is estimated that half a million people will buy an annuity this year. The Pensions Management Institute and National Association of Pension Funds report Treating DC scheme members fairly in retirement, published in February 2012, said 85% say they need help and, unlike other financial decisions, they may get just one chance to get it right.

Altmann added: “Annuities are not an ideal product for 21st century later-life lifestyles. The standard annuity gives no protection against inflation. That is a big issue. If you happen to buy now, when rates have been artificially forced down so we can stimulate the economy, you’re locked in for life. If rates go back up again and you’ve bought today, you have no chance of getting a better deal later.”

Consider all options

Of course, annuities are not the only option. It is important an employee considers all their options, such as an annuity, income drawdown or a combination of both, including phased retirement.

The Rethink retirement survey, conducted by Wealth at Work in December 2012 among some of the UK’s largest companies, revealed that employers believe only 18% of staff are aware of the various retirement income options available and as few as 13% know they no longer have to buy an annuity.

This suggests a solution is needed to ensure people understand what their retirement income options are and how to maximise their income.

It also seems the end of fixed retirement dates will see many employees work longer, often opting for flexible retirement, with their retirement income supplemented by earnings from part-time work.

It is therefore unsurprising that the Rethink retirement survey also revealed that 71% of employers believe there will be an increased requirement for specialist advice at retirement.

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It is no wonder many employers now see professional retirement planning for their employees as critical to their business. Retirement income option education and advice must now be a core provision for any organisation that is running a DC pension scheme.

Jonathan Watts-Lay is director at Wealth at Work