In the new world of freedom and choice in pensions, one of the fundamental elements of employee financial wellbeing is retirement preparation. Many employees will turn to their workplace for support at this stage of their life, so Wealth at Work has listed five ways employers can help staff who are facing retirement.
First, encourage employees to put a plan together. Before making any decisions, employees should consider how much income they will need in retirement, for both day-to-day living expenses and discretionary spending, such as on holidays and hobbies. In addition, they should think about how their income needs may change over time.
Employees will then need to work out whether they have sufficient savings to meet these requirements by looking at all their assets, including all pensions, individual savings accounts (Isas), shares and deposit accounts.
Subjective expectations of survival and economic behaviour, published by the Institute for Fiscal Studies in April 2018, found that most people live longer than expected, so employees should keep this in mind when doing their sums.
Second, ensure employees understand their retirement income options. Those with a defined contribution (DC) pension will need to decide how to access their income, whether that is through drawdown, buying an annuity or taking it as a cash lump sum, or indeed a combination.
In March 2018 Wealth at Work published the Focus on retirement income matters report, which found that only 22% of employers believe their employees understand all of the options available at-retirement.
Third, help employees understand the tax rules. A poll conducted on the Wealth at Work website in December 2018, which received 70 responses, found that 91% of respondents did not understand the tax rules when withdrawing money from their pension. Employees could, therefore, find themselves paying more tax than they need to if they do not plan carefully.
Fourth, encourage employees to shop around. In its consultation paper, Retirement outcomes review: Proposed changes to our rules and guidance, published in June 2018, the Financial Conduct Authority (FCA) found that those who go into income drawdown could increase their annual income by 13% by switching from a higher cost provider to a lower cost one.
It is crucial that employees do as much research as possible to ensure they select a retirement option that best suits their needs. This means finding a solution that enables them to access the right amount of cash as and when they want it, and for as long as they need it.
Fifth, make sure employees are aware of pension scams. Speaking at the Pensions and Lifetime Savings Association (PLSA) conference in October 2018, Margaret Snowdon, chairman at the Pensions Administration Standards Association (PASA), estimated that pension savers have lost more than £1 billion to scams. So, whatever employees are planning to do with their retirement savings, it is of vital importance that they understand the risk of scams and how to protect themselves.
They can do this by checking whether any firm that they are planning to use is registered with the FCA. They can also visit the FCA’s ScamSmart website, which includes a warning list of businesses operating without authorisation or running scams.
Through all of these steps, the key thing to remember is that employees need to understand their options before making any decisions. This includes understanding the generic advantages and disadvantages of various options, as well as considering any associated risks such as tax inefficiency, longevity, losing money to scams and, ultimately, running out of income sooner than expected.
Many workplaces now offer support to their employees in terms of financial education, guidance and regulated advice, so that employees are informed at-retirement and can make better choices, which will lead to better outcomes for all.
Jonathan Watts-Lay is director at Wealth at Work