The radical changes to pensions mean that employees now have much greater flexibility and choice over how to access their pensions than ever before. The ability to take as much as you like from your pension when you like, combined with the tax changes to allow wealth transfer, offers the potential for life-changing opportunities.
Perversely, this increased choice and flexibility also brings greater complexity and risk. Making the wrong decisions could have dire irreversible financial implications, and highlights the need for greater knowledge and understanding to ensure that employees achieve good retirement outcomes.
A number of recent studies have highlighted that employees are not well equipped to make these important decisions on their own. For example, the International Longevity Centre (ILC) think-tank report earlier this year [title and date to come] highlighted how unfamiliar people are with the options now open to them.
This found that only 20% understood what an annuity is, only 35% understood what drawdown is and only 20% knew their marginal rate of tax.
This basic lack of understanding is reinforced in the December 2014 report published by benefits consultancy Aon [title to come]. Some 68% of the 2,000-plus pension scheme members surveyed said they wanted a guaranteed income for life from their pension fund, yet only 14% said they would buy an annuity with the entire fund. This is no doubt influenced by the negative publicity annuities have received.
In an environment where retirement choices and freedoms are now extensive, and where the tax and longevity implications are significant, these basic shortcomings highlight the need for a dramatic rethink on how employers and trustees assist employees.
The transition into retirement is increasingly a gradual process rather than an event that happens on one day. YouGov recently [report publication and title to come] highlighted that around 50% of employees currently expect to continue working past state pension age. This could present a range of implications for the employee and employer if they are still paying into a workplace pension scheme. There is now a clear need to provide access to information and, where required, professional financial advice.
The perception of high costs, a lack of suitable resources and the fact that the employee retires from the business has led to a reluctance among many employers to provide retirement services to their employees. Changing regulations and demographics, along with an increase in unscrupulous scamming activity, mean that keeping the status quo and doing nothing is no longer an option, and is no longer necessary because of advances in technology and digital solutions.
The provision of cost-effective advice has historically been a challenge, however with the advent of the Retail Distribution Review (RDR) and the pension freedoms, we have seen innovation in the market with the advent of telephone advice models and the UK’s first digital full retirement advice service, which can quickly and conveniently provide a personalised recommendation.
Consequently, cost need no longer be a barrier to supporting what, for most employees, will be the second most significant financial decision they make in their life (behind buying their home).
Box: Three key actions advisers and employers or trustees can take to ensure good retirement outcomes for employees:
- Review the options to improve communication and support material available to employees from as early as age 45
- Review the range of advice, fulfilment options and technology available to provide access to quality affordable advice for all employees
- Assess the feasibility of employers meeting or subsidising the cost of advice to ensure good retirement outcomes.
Steve Lewis is head of distribution at LV= Corporate Solutions
