Choosing the right retirement option is complex, but there is much employers can do to help their staff make the right decision, says Andrew Pennie, head of pathways, Intelligent Pensions
The new pension freedoms have been in place for almost two years and there is no doubt that employers, trustees, providers and the government are still playing catch-up to help members safely and effectively use the freedoms to create good-quality outcomes.
Too many schemes and members are overly focused on the date people intend to stop working to make plans but by then it’s usually too late to take corrective action and many are in the wrong place at the wrong time from an investment perspective.
Current communications are proving less than effective and many members are left vulnerable to pension scams and/or unwittingly scamming themselves by making poor decisions.
So when do your employees need the education and advice? Well, the key advice areas in the pre-retirement years are as follows:
1. Defined contribution (DC) decumulation planning
2. Defined benefit (DB) transfer advice
3. DC/DB Lifetime Allowance (LTA) Planning.
DC decumulation planning:
Decumulation is an awful word and simply means how to convert pension savings to a pensions income.
This process should start in the years approaching retirement. Employees will need to make two key decision at this stage:
1. What retirement income strategy will I use?
2. How should I best invest to achieve it?
We have seen some workplace schemes add drawdown and cash-out glidepath options to the traditional annuity derisking options, namely ‘lifestyling’ and ‘target date’, and some have even gone as far as changing the default strategy.
Annuity and cash-out glidepaths can be reasonably effective for someone who indeed ends up buying an annuity or cashing-out.
But there are problems for the growing number of people wishing to remain invested in retirement because drawdown glidepaths are much less effective. Drawdown is a series of transactions that will be different for each individual’s objectives, so much greater personalisation is needed.
DB transfer advice:
Pension freedoms and general market conditions are driving more DB to DC pension transfers than ever before. Anyone with more than £30,000 of DB benefits must take advice from a ‘pension transfer specialist’ before a scheme can make a transfer. Accessing this advice from an experienced adviser can be a challenge, with costs varying significantly, as well as the robustness of the advice process.
Employers and trustees could support members by directing them to a quality adviser and in the process could probably arrange more favourable pricing terms for this work.
A reduced LTA is now affecting more employees and often catches out those with both DB and DC benefits. The LTA charge is an insidious tax and often catches people completely unawares and in the form of a very large tax bill. Employees need help and advice to understand whether they could face an LTA charge and what possible actions can be sought to mitigate the potential charge.
Pensions are complex and members will have different objectives and priorities. Mistakes are easy, expensive and often irreversible and we must find a better way to support members making retirement planning choices.
The government has woken up to the need for better support and advice and taken swift action to re-scope the pension guidance service, build a pensions dashboard, increase the HMRC allowance for employer-funded pension advice and is consulting on a new ‘Pension Advice Allowance’. These initiatives are all welcome but others need to take action if these measures are going to achieve the desired results.
Employers are well placed to either provide or facilitate regulated advice for their members. If I had one message for those involved in workplace pensions, it would be simply to look at some of the specialist workplace advice solutions. Find out what these services can deliver, most importantly for your staff but also for trustees and employers: after all, regulated advice comes with full regulatory protection that can only benefit everyone.
Let’s make 2017 the year advice was better used to help more people achieve better retirement outcomes.