Need to know:
- Employees nearing retirement need to know if they can retire and what their options are.
- Employers can direct them to support from providers, send out newsmails or facilitate access to qualified financial advisers.
- It is important for employers not to be seen to be pushing people towards retirement or offering financial advice themselves.
Employees who are approaching retirement have an obvious need for information about what their options are, if and when they choose to stop work. Yet often this is not provided by employers, and many people risk making poor choices that could impact on their future quality of life.
At a basic level, staff need to understand when they can afford to retire, says Steve Butler, chief executive officer (CEO) of Punter Southall. “This involves understanding their financial situation, how much more they need to save, and whether they need to continue working,” he says. “While employees starting work today will have a defined contribution (DC) pension, many in their 40s and 50s, who missed out on defined benefit pensions and were working before auto-enrolment was introduced, will face a pension shortfall.”
Understanding options
There are essentially three options available to those looking to access funds: purchase an annuity, drawdown funds over time, or take it out as cash. Philip Smith, DC director at TPT Retirement Solutions, says: “Most employees will opt for a combination of drawing their pension down over time, taking some of it as a lump sum or buying an annuity.
“Withdrawing a pension as a cash lump sum is often popular as many employees want access to their savings as soon as possible. However, this can have tax implications if they withdraw beyond their tax-free limit.”
One option here could be an uncrystallised funds pension lump sum (UFPLS), he adds.
Drawdown has proved a popular option on the DC side in recent years but this may not always be the best option, says Katie Stone, senior client relationship manager at Trafalgar House. “Recent increases in interest rates have enhanced the attractiveness of annuities, although they have not returned to being the preferred option,” she explains. “This shift underscores the dynamic nature of retirement planning, where economic conditions and member preferences drive the evolution of available choices.”
Effective communication
Employers can use a range of tools to help inform those nearing retirement of their options. “The most popular is directing employees to government services for advice on money and pensions,” says Butler. “Another is to direct employees to their pension providers, which can offer information via letters or emails and will have educational websites. Others will use an employee benefits consultant or independent financial adviser to deliver workshops or guidance, but these options are more expensive.”
Working with providers can help with employee communications, says Kim Nash, managing director at Zedra Governance. “Is there anything you can work on together as pilots, or can you get them into your offices to do some face-to-face presentations or bespoke webinars?” she asks. “Seeing and speaking to the workforce and being in the environment directly will lead to a better understanding of the questions being asked by the membership.”
There is a growing trend towards more personalised support with qualified financial professionals, says Stone. “An increasingly popular trend is for employers to sponsor individual financial advice sessions as employees approach retirement,” she says. “These can be funded wholly or partially by the employer and are invaluable because they offer tailored advice specific to the individual’s needs.”
These can be done through personalised videos, but face-to-face sessions typically generate the most engagement.
Any employer engaging in at-retirement communication needs to make sure it is not perceived to be pushing people towards it. Lydia Wawiye, an employment lawyer with Parfitt Cresswell, explains: “The general rule is that employers cannot force an employee to retire or set a retirement age for the whole workforce, unless it is a proportionate means of achieving a legitimate aim.”
Employers also need to be aware of the difference between guidance and financial advice. “Guidance provides staff with information about the various options available to them but should not recommend any one option over another,” says Smith. “Financial advice informs employees which specific product would best suit their needs. Employers can provide guidance, but financial advice must come from appropriately qualified professional advisers.”
Regulators are currently exploring how employees could receive more tailored support beyond guidance, because many do not have access to financial advice.
It is important, too, to ensure communications around retirement options are not left too late. Russell Wright, DC consulting senior vice president at Redington, says: “Those in their early 50s don’t need to understand the difference between UFPLS, annuity and drawdown. But they do need to be given the tools to know if they’re saving enough for their retirement. Conversely, those near the point of retirement do need to understand the different retirement options. A one-size-fits all approach risks confusing and alienating everyone.”
