Jonathan Watts-Lay, director at WEALTH at work, asks how employers can help their staff manage all their assets
Is Pension Wise enough for employees looking at their retirement savings? It is important that we realise the limitations of the service. Pension Wise only covers defined contribution (DC) pension schemes – not defined benefit (DB), or any other financial assets that an individual may have.
In this new world of pension freedom, it doesn’t make sense to start drawing your pension without considering all your other options and assets: so while Pension Wise might work for people who have DC and nothing else, it doesn’t really work for those individuals who also have DB, or who have other assets such as ISAs, deposit accounts, company shares and so on.
The Work and Pension select committee figures show a very limited take-up of the service since its launch in April; it appears less than 1 in 4 pension savers taking money from their pension scheme are even making an appointment and some of those are not actually keeping their appointment.
Some providers suggest that part of the problem is that although legally they have to mention Pension Wise, and may do so several times when speaking to savers, it just isn’t well understood by some people. Many don’t know what the service does and want to get their money as soon as possible, without realising the implications: for instance seeing an unexpected chunk of money going straight to the taxman.
Interestingly, tax is one of the key considerations to understand when taking income from the different types of savings you might have. Looking at it from a purely tax perspective, your pension is probably not the first thing you should take income from. For example, taking money from an ISA rather than a pension has the effect of increasing your annual income level before you start paying tax. This is because ISA income is tax free whereas pension income is not. When you consider other savings, the picture becomes more complex; tax is important to understand if you are trying to maximise income for yourself rather than the Inland Revenue!
Employers can play a major role in highlighting these issues and other potential pitfalls to their employees.
Before the pension changes were announced most DC schemes assumed that the individual would buy an annuity with their retirement pot – it’s now clear that the vast majority are not, at least in the short term.
Aligning the types of investment asset in a pension savings pot over time, with the likely retirement income option is known as a glide path. It’s normal to see the mix of assets start to change from about 10 years from retirement as schemes look to lock in gains made earlier in a career. With more retirement options open to pension savers now, making an informed choice about where your money is invested in the years leading up to retirement is arguably more important than ever. Since DC scheme members can start to access these savings from age 55, it makes sense that employers should start talking to staff from the age of 45, so they are aware of the new retirement options and know that the investment decisions they make over the next ten years should be influenced by what retirement option(s) they may choose.
Good quality financial education is an absolute necessity to support decisions like this. And people who are already on the glide path to annuities without realising it need educating about what their other options are.
There are big decisions for employees already at retirement. Enlightened employers are keen that employees understand what their retirement income options are, because there’s a worry that people will just jump from one extreme – taking annuities – to the other – taking cash in one chunk. There’s a real issue around making employees aware of what their options are: if they make poor decisions, they will want to know why their employer didn’t explain all the options and implications to them.
Lastly, even those who understand their options and have a good idea about what they would like to do can find themselves frustrated when it comes to implementing their chosen retirement plan. Very few schemes can actually offer the full pension flexibilities, so there is an increasing pressure on employers to find the right partner who can and will help employees at retirement.
The ideal will be a holistic service which can deal with the many issues the new pension flexibilities raise. It might offer financial education to help employers understand the options available and the advantages and disadvantages of each; one to one guidance and regulated advice for those who need it and; a service which can help employees to access their chosen option(s) in a simple and straightforward manner, whether they want to take cash, buy an annuity, go into drawdown or indeed have a combination of each.
This calls for a new breed of service provision. WEALTH at work are at the forefront of this, offering financial education, advice and the full range of retirement income options.