Financial education supplement 2008: Pensions tutoring vital for staff

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UK companies are still not offering their employees adequate and correct pensions guidance to help them in their decision making – especially at the point of retirement so that they fully understand their retirement options.

The message is clear from much recent research that UK employers need to evaluate the type of pensions information they are currently providing and whether it helps employees make the right decisions about their financial future.

Employees need to understand their income options at the point of retirement otherwise they could spend the rest of their lives regretting the decisions they have made. Many people will spend 25 years or more in retirement so the decision at this point probably has a bigger impact on their financial wellbeing than any other financial decision they have made or need to make in their lifetime.

Indeed, the Pensions Regulator expressed the need to offer employees an alternative to annuities while also supporting the need for education and guidance in the workplace in a consultation document, How the Pensions Regulator will regulate defined contribution (DC) schemes in relation to risks to members, published in 2006. The onus is now on employers and trustees to ensure members understand these options at the point of retirement.

It reads: “We expect that trustees will ensure that members are made aware that they can exercise the open market option; are aware of the design of annuities and the different types available; and understand the alternative retirement options open to them.”

It goes on to say: “There are alternatives to purchasing annuities that are available to DC members such as taking a lump sum or income drawdown (unsecured income or alternatively secured pension). The regulator takes no view on the appropriateness of the different options available; we want to ensure that members have access to the information that will allow them to make an informed choice according to their needs.”

Many employees save into their pensions throughout their lives yet if employers don’t ensure retirement income options are understood, these pension savings will not be converted into the most appropriate retirement income for their needs.

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Employees now have a wealth of choices and utilised correctly, they can significantly boost pension income, yet all this choice means confusion. A well implemented financial education programme has to be the best solution.

Education is truly vital and is the best way to ensure staff make informed choices about their retirement income.