Employers should protect retiring employees

Debi O’Donovan, editorial director at Employee Benefits: In my experience, most employers are only too keen to wash their hands of any annuity decisions made by retiring staff. For many employers, simply offering a workplace pension is taking their duty of care far enough. I believe this is an outrageous neglect of duty by employers. Once they have offered a pension, of whatever kind, to totally abandon their soon-to-be-retired employee just at the point they are about become financially vulnerable is wrong.

It is common knowledge that many people simply buy an annuity from the firm that supplied their occupational pension. Many, no doubt, not realising they can shop around; and that in the majority of cases they will do better to avoid their current occupational pension provider.

Too many employers fail to point out that the retiree does have a choice of where and when they buy an annuity and very few will suggest that the employee speaks to a financial adviser. Naturally the current pension provider has a vested interest to keep mum.

Even if an employer has been able to offer the best pension plan in the market and, over time the best possible investment returns have been built up, all this good work can be wiped out in one fell swoop by the purchase of low rate annuity.

With some providers looking to cherry pick the unhealthiest retirees (based on postcode data) to sell annuities to, the discrepancies between the best and worst annuity rates on the market are set to grow. Loads of data is coming onto the market clearly showing which areas in the UK have what longevity rates. Notoriously, Glasgow is often cited as its inhabitants tend to have lower life expectancies. It is much be poor comfort to Glaswegians to know that their reputed unhealthy living can lead to better annuity rates.

It is even more crucial in a post A-Day world, where the choices employees need to make have increased, that employers proactively offer their retirees access to IFAs.

If guided by a good IFA an employee can shape a retirement strategy that fits their lifestyle choices – be it immediate 100% retirement at the appointed age, ongoing full time work after 65, or a gradual winding down doing fewer days or hours each week over several years until the pull of the armchair and slippers (or international cruise) becomes too strong. HR departments are geared up to understanding flexible retirement and the graying of the workforce, but fail to integrate this with the implications of taking the 25% lumpsum versus using draw-down or a short-term annuity. These pensions tools are designed to complement flexible retirement, but need to be applied cleverly to ensure pensioners who have saved enough are not caught short.

Just as I believe that employers are opening themselves to heavy criticism, if not litigation, if they don’t offer access to financial advice on their employees’ investment choices when saving into a DC scheme, so I believe the same danger applies to buying annuities.

An employee discovering that their pension could have been several thousand pounds higher a year simply by shopping around is not going to be a happy advocate of their former employer. And they may get litigious.