Latest findings from the FCA indicate that since the pension changes, twice as many pension pots have moved into drawdown than annuities. The proportion of drawdown bought without advice has risen from 5% before the freedoms to 30% now, and the vast majority (94%) of people who went into drawdown without taking financial advice, accepted the drawdown scheme offered by their existing pension provider[1].
Jonathan Watts-Lay, director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, believes that financial education and advice is key to helping employees make informed choices about their pension drawdown scheme.
Watts-Lay comments: “The ramifications of people failing to understand the retirement choices available to them and, as a result, blindly selecting the wrong product for their life savings is a huge problem.
“For example, employees need to know that there could be a difference of up to £10,000 over a decade between the most expensive drawdown provider versus the cheapest, according to research by consumer group, Which?[2]
“It is crucial that employees shop around to ensure that they select a retirement option that best suits their needs. This means finding a solution that enable them to access the right amount of cash as and when they want it, and for as long as they need it.
“For example, a 65-year old man now has a 50% chance of living to 87 and a woman of the same age has the same chance of living until she’s 90,[3] so employees need to understand that making their retirement savings last is key.”
He continues: “Too many drawdown products have been bought without financial advice, which puts employees at huge risk of paying too much tax. Employees need to make sure that their selected option is as tax-efficient as possible in order to maximise their retirement income.
“But it’s not always easy for employees to understand the decision-making processes involved. It can be confusing trying to understand the often overly complex structures and fees of drawdown schemes, let alone decide which one best suits their needs.
“Very few employees have the specialist skills required to undertake this evaluation, let alone manage the investment risks involved, which is why I wholeheartedly agree with the financial watchdog, the Financial Conduct Authority, that poor choices can mean individuals miss out on investment growth, being exposed to investments that are too risky for them or running out of their pension savings sooner than expected.”
Watts-Lay adds: “Uninformed employees are taking risks with their hard earned savings by blindly selecting retirement products with little, if any, understanding of their choices. They are also easy targets for fraudsters attempting to scam them out of their life savings – situations that we want to avoid at all costs.
“Research suggests that between April and June this year, more than a fifth of individuals over the age of 50 were reportedly targeted by potential scammers offering unsolicited pension advice or investment opportunities.[4]
“The fact that almost nine in 10 (88%) individuals selected a bogus pension’s advice offer when shown a mock advert[5] means that it’s time for the financial industry, together with employers, to tackle this serious issue head on and educate and support employees so that they can fully understand all their options at-retirement.”
He concludes: “Employers need to take action by making financial education a priority for employees so that they understand their options and the implications of their decisions in the lead up to, and at the point of retirement. This should then be followed by financial advice to provide individual support, which can save employees money in the long run as poorly thought out decisions can be very costly.”
[1] https://www.fca.org.uk/publication/market-studies/retirement-outcomes-review-interim-report.pdf
[2] press.which.co.uk/whichpressreleases/revealed-the-true-cost-of-pension-freedom/
[3] https://www.moneyadviceservice.org.uk/en/retirement-income-options/income-drawdown
[4] http://newsroom.retirementadvantage.com/18m-over-50s-targeted-by-scammers-in-the-last-three-months/
[5]https://www.citizensadvice.org.uk/Global/CitizensAdvice/welfare%20publications/Too%20good%20to%20be%20true%20-%20Understanding%20consumer%20experience%20of%20pension%20scams%20a%20year%20on%20from%20pension%20freedoms.pdf
