The problem of how employees access their defined contribution (DC) pension schemes to draw income seems to be a growing issue in the pensions industry. The debate on the topic has centred on the need for innovation to create a new default option to replace annuities, where a product can be accessed by employees to solve all of their needs; but is this really the answer?
With income drawdown now the most popular method of taking income from a pension and the old default of an annuity being inappropriate for many, employers need to act quickly to provide a suitable alternative for this new world.
Many in the industry are waiting on a new default product to replace annuities and solve all retirement needs, and so far there has been little innovation in the market. However, I strongly believe that a new product is not the answer; because once in active retirement, a one-size-fits-all approach does not work.
After all, freedom and choice in pensions now means that individuals have so much to think about when they reach retirement. For example, finances must now be considered in terms of all savings such as individual savings accounts (Isas), shares and any cash savings plus potentially that of partners. Not to mention, things like tax status, health, longevity, property, and any possible inheritance also need to be considered. This demands a holistic approach to retirement, having a well thought out plan rather than simply purchasing a one off retirement product as a source of retirement income.
Not only this, but there is also the danger that employees could throw away their hard earned retirement savings by investing in inappropriate products, or perhaps even worse by falling prey to a friendly scammer, and it seems that many are at risk of this. Worryingly, the Financial Conduct Authority (FCA) found that almost half of those opting for income drawdown in retirement have done so without seeking advice, which would leave them without the additional consumer protection that regulated advice brings and with nowhere to turn if anything went wrong.
So, what can be done to support employees to make the right choices as they reach retirement?
Employers need to evolve with the times by adopting a service model; this would provide the support needed for individuals to access the right retirement income options throughout retirement, whether that is guaranteed income, flexible income, growth potential or a combination of all. Advantages would include better-tailored retirement income options for employees, and provision through the entire retirement journey.
Financial education should be 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. It can also develop employee knowledge of the various retirement choices available. Regulated advice is the next really important step in making the right retirement choices based on an individual’s unique personal circumstances and also comes with the safety net of greater consumer protection.
Jonathan Watts-Lay is director at Wealth at Work
