Need to know:
- Employers should actively support people in retirement decisions, because pension choices are complex and many employees receive little or no financial advice.
- Make use of pension providers’ tools and data, such as communication templates and modelling tools, to improve engagement and target problems like low beneficiary nominations.
- Employers play a trusted and influential role, so they should communicate clearly, monitor industry developments, and provide ongoing education to help employees plan effectively for retirement.
Retirement choices are a hedge maze. As Phil Brown, head of defined contribution (DC) and master trusts at Pensions UK, points out, from considering what they will pass on to the next generation and dependents, to what type of annuity and/or drawdown combination to pick, the choices are overwhelming for members. Perhaps most importantly, there is not an obvious ‘right’ answer in many cases.
Mark Futcher, partner and head of DC at Barnett Waddingham, adds: “We’ve been saying to employers: provide support at retirement. People put lots of money aside but then employers provide no help and support to members at retirement. If a member makes the wrong choice there, they can waste 10 years’ worth of contributions.”
Only 9% of adults received financial advice about their pensions or investments in the previous 12 months, according to the Financial Conduct Authority (FCA)’s Financial lives 2024 survey. That is partly due to the cost of advice, and partly due to a shortage of advisers, says Brown. Employees can make use of the Money and Pensions Service’s (Maps) free MoneyHelper support, such as Pension Wise. Employers should direct employees to helpful resources which will help them to shop around for the right product to fit their circumstances, like MoneyHelper’s pensions tools, says Brown.
Retirement paths
Employees have a number of options to take at retirement. One is to buy an annuity. This insurance contract provides people with a guaranteed income for life, or for a fixed term. In most cases, people can buy an annuity from the age of 55 and can also take a tax-free lump sum of up to 25% from this age. Annuity rates go up and down, depending on what else is happening in financial markets.
Drawdown is currently the most popular option for retirees, according to the FCA’s retirement income market data 2024/5. Drawdown allows retirees to take their money out of their pension at a pace which suits them, while leaving the balance invested. Again, retirees can take up to 25% of the pot as a tax-free lump sum from age 55. Providers’ rules will vary on how retirees can take income, and there may be charges associated with taking lump sums or varying the pace of withdrawals.
There is also the option of some combination of the above. A combination of drawdown and annuity purchase will be a good option for some retirees, allowing them the flexibility of drawdown for the early years of retirement, followed by the certainty of a regular income in their later years. Products are still developing.
Pension provider’s tools
Providers offer a lot of help to members, which employers can signpost. “[Employers] can pick up communications templates and use those to communicate with members,” says Brown. ”Many providers also offer modelling tools.”
Many good providers will also show employers data, insights on member behaviour and offer site visits, adds Futcher. “You could argue members are paying for that so they should be taking advantage of it.”
One way to use member insights is to look at areas of low take-up and make it a mission to improve the situation, says Nick Roy, commercial director of workplace at Aegon UK. For example, if few members of a pension scheme have nominated a beneficiary to receive their pension, “[the employer] can then target the people who haven’t done it and send a mailing to them”, he adds.
Monitor the market
Lots of clarifications and new initiatives are coming to help members and employers, explains Futcher. Among them are the FCA’s targeted support, which will enable providers to give tailored suggestions to groups of members with common characteristics. “That will really shake this up,” he says.
The pensions industry is also awaiting clarification on the advice/guidance boundary, which may help providers and employers alike to feel more confident in communicating to members. Default pathways into retirement are also coming.
Pensions dashboards are also on the way, which will allow people to see all their pension pots in one place. “I think dashboards will be helpful to remind the individual they have all these pots and they should be looking more holistically,” says Futcher. ”If they are married or have a partner, they should be looking at those pots alongside as well.”
Pension providers can keep employers up to date with all these developments.
Employers can be nervous to be too instructive, for fear of accidentally straying into giving regulated financial advice. However, they should not be afraid to warn people that if they move their money from a workplace pensions environment into the retail world, they will lose some protection, says Brown. For instance, the charge cap will no longer apply.
“What [we] can’t underestimate is the credibility of the employer,” says Roy. “[We] find that in a lot of cases, the employees don’t really know who their provider is. Employer sponsorship of any types of events, either on site or online, is critical.”
