The financial world has changed a lot in the last few years, with many employers saying it is down to staff to decide, from the benefits on offer, which ones are right for them and how to maximise their value.
The example often quoted is the move from defined benefit to defined contribution pension schemes, where the employee now needs to decide how much to contribute, which funds to invest in and, ultimately, how to turn it into income. But, in fact, this applies to many benefits.
For example, is saving into a workplace pension better than a workplace individual savings account (Isa) or share scheme? Which is most tax-efficient or provides the best value? It’s fine to say, ‘save more into a pension’, but can employees afford it? Can other benefits help with that affordability?
For example, by using salary sacrifice arrangements for childcare vouchers, the tax saving can be put into a pension and possibly benefit from matching and further tax relief. And utilising shopping vouchers via a voluntary benefits scheme can provide, say, a 5% saving on the weekly shop. But employees must learn how to fund future savings, so how can this be achieved?
A financial education programme can be provided on a segmented basis, based on employees’ life stages, targeting specifically those in the early years, those in the middle of their career, and those considering, or at the point of, retirement.
Early career seminars can provide insights on how to save money by using existing benefits such as a workplace Isa or share scheme. Mid-career seminars may focus more on what has already been saved and how this can be enhanced to meet longer-term needs, such as retirement income.
Seminars provided in the run-up to retirement are also crucial for showing how pensions, share schemes and other savings contribute to retirement income. Choosing the most suitable retirement income option is probably one of the biggest financial decisions anyone will ever make, and a wrong choice could have devastating consequences.
Buy an annuity
It is estimated that half a million people will buy an annuity this year, but annuities are not the only option at retirement. Employees must consider all their options, such as annuities in their various shapes, income drawdown or a combination of both.
Wealth at Work’s Rethink retirement survey, conducted among some of the UK’s largest employers, revealed that they believe only 18% of employees are aware of the various retirement income options available, and only 13% are aware that they no longer have to purchase an annuity.
With the benefit of financial education, all retirement income options can be discussed, with the advantages and disadvantages clearly explained.
For some, the purchase of an annuity is the correct decision, but all factors must be considered. For example, completing medical and lifestyle questionnaires could result in significant income enhancements. For others, income drawdown can offer a more flexible way of providing income while potentially leaving capital to a spouse or partner upon death. For many, it will be appropriate not to make a single decision at the point of retirement.
Financial education needs to be supported by advice to ensure staff not only make the correct decision when generating retirement income, but continue to have support throughout retirement.
Jonathan Watts-Lay is a director at Wealth at Work
