With retirees able to make huge decisions around their pension pots, Helen Swire draws together some top tips on what they need to consider – and how employers can help
The Pensions and Lifetime Savings Association’s rebrand from the National Association of Pension Funds says it all – retiring is not just about your pension.
Yes, staff might want to utilise their newfound freedom to take their pot – but there is much more to retirement than this. Retirees have to understand the ins and outs before they make rash decisions.
The PLSA urges employees to “be informed, be realistic, and take your time”.
Its chief executive Joanne Segars says: “These reforms announced just over a year ago have radically changed the options savers have about how they can access their retirement savings.
“It’s clear savers feel positively about the reforms, but our research also tells us that only one in three of the people who will be eligible to use the pension freedoms in the next five years feel very confident about making their own financial decisions.”
So what do employees need to be thinking of when they plan their retirement? And how can their employers help them? Reward has drawn together some top tips to guide staff through retirement planning.
1) What is your workforce retirement plan?
As your employees reach retirement, do you know what options you’re going to put on the table for them? With the media attention around the pension freedoms, employees may assume that everything will be open to them. However, you need to know what their needs in retirement – and expectations from their pension – are, and how best you can meet those needs.
Beyond the default, employers must think about the post-retirement options for their workforce, whether that is cash, drawdown, or even an annuity.
Do you know what your scheme or mastertrust is offering in terms of pension freedoms? If not, now is the time to check – and if not all the options are being offered, think about how you will communicate this to staff and guide them towards information on their choices.
“People will have different needs,” says Andrew Pennie, marketing director at Intelligent Pensions. “Employers need to have a range of opportunities that responds to the diversity of their staff.”
2) Examine your investment options and defaults
The fund choices and flexibilities offered to a workforce are the individual employer’s prerogative – but you must be clear about what you are offering, and what your workforce needs from you.
“Do your employees understand what they’re invested in when they are leading up to retirement?” asks Jonathan Watts-Lay, director, WEALTH at work. “When employees are at the point of retirement, you have to make sure they understand what their options are and how they can access them. What are you, as the employer, going to offer?”
The default fund remains front and centre, as the majority of many workforces will still end up here.
So, once you know what options you are going to offer, it may be time to re-examine your default fund in terms of what your workforce needs.
Different at-retirement options require wildly different asset mixes, so you need to make sure your employees have thought about what they require carefully.
“The default cannot be cheap and cheerful,” says Simon Chinnery, head of UK Defined Contribution at J.P. Morgan.
“It has to be member-focused, well-diversified, flexible and managed actively, so that the dynamics of politics, regulations, markets and risks are all addressed.”
3) Segment, communicate and engage
“The best way to get people engaged with their pension is to make it as meaningful and relevant as possible to different cohorts, so it is key to segment the workforce,” says Watts-Lay.
That segmentation could, for example, be age or life stage: at the beginning of an employee’s career they might simply need to be encouraged to contribute to a company pension, whereas mid-career employees will need a check point around their savings.
Meanwhile, the older cohort needs to consider their pre-retirement glide path and their at-retirement options. Engaging your workforce, then, must be an ongoing process throughout their working life.
Chinnery agrees: “Before, communication was about saving early, and as much as you could – but now it’s more about holistic financial wellness.”
4) Educate your workforce
Whether you’re a paternalistic employer, or whether offering a good pension is simply down to a commercial need for your workforce to be able to retire, financial education is a must.
Employers need to ensure that from the moment that someone joins the workforce they need to understand how their pension works, what the default and investment choices are, and what the contribution structure is. And a key element of financial education is now in line with the concept of ‘lifetime savings’ – employees must understand all their assets, such as SAYE schemes, sharesave and ISAs.
Alongside traditional education formats such as seminars, online modelling tools are becoming increasingly popular to help employees see exactly what they have saved, what they are predicted to save, and whether it will be sufficient for their desired retirement income.
5) Don’t hide from advice
Intelligent Pensions’ Pennie cautions employers on overreliance on modelling tools. He says:
“Modelling is positive, and helps people to engage – but it also needs to point people to specialist advice, which will address the right issues and questions.”
There is a perception that financial advice is extremely costly, but in reality the expense can be worth the cost of ensuring that your workforce is clued up about their savings and can afford to retire at an appropriate age.
Moreover, employers can actually provide £150 of pensions advice per worker before it is classified as benefit in kind for tax purposes. All they need to do is ensure that it does not extend beyond pensions into general financial advice.
There are plenty of providers who can educate and advise staff, and offer the full flexibilities that are available. As Pennie points out: “Advice provides regulatory protection to all parties, and is the only sure-fire way of giving people the expertise they need to make the right decisions.”
1) Plan what you want to live off – and how to achieve that
Annuities, for all their negative press, took a difficult life decision and made it easy to understand. Now, with the new freedoms, it is vital that employees plan properly when they’d like to retire and what they hope to be able live off.
Part of good planning is to take a broad view of the value of your assets to gain an overall financial picture of where you are, where you’re heading, and how feasible your plans are – an area where financial education and modelling tools can help.
If your planned future looks sustainable and achievable, you then need to plan which strategy you are going to use (annuity, drawdown, cash and so on), and how best you should invest to achieve that.
2) Understand the legislation and ask what advice you need
Employees need to have an idea of the options they have at retirement – look at the new legislation, and ensure you understand the advantages and disadvantages of the various choices.
WEALTH at work’s Watts-Lay suggests: “When you understand your options, you must then ask if you are comfortable with making a decision, or if you feel that you need to go to a regulated adviser for help.”
Melinda Riley, head of policy, technical and advocacy at The Pensions Advisory Service, adds: “There’s also a need to manage expectations around what you can and can’t do in the freedom and choice space. A conversation with TPAS or Pension Wise can help people overcome these misconceptions.”
3) Understand the costs and tax implications
“With pension freedoms comes a ‘take the money and run’ attitude,” warns J.P. Morgan’s Chinnery. “If staff take all their cash they might incur tax bills that could have been easily avoided – and that’s where advice is needed. Through ignorance we see people doing unnecessary damage to themselves.”
Only 25% can be withdrawn tax-free as a cash lump sum. This means retirees who have set their heart on withdrawing their pension pot may be hit with a hefty tax bill if they don’t fully understand the costs of taking more.
Many myths surround the costs of regulated advice, yet people are not flocking to the free Pension Wise service: both are avenues that could potentially save retirees a considerable sum.
4) Take all your savings into account
Part of avoiding possible tax bills at retirement is exploring the idea that your pension pot shouldn’t necessarily be your main retirement fund.
“You need to think about investment – if you’re going to just take your money out and put it in another bank account, you might not need to take it out in the first place. There might be more flexible vehicles to help you do that but with less tax implications,” suggests John Chilman, group reward and pensions director at FirstGroup.
“You might not want to consider your pension as your first income in retirement – maybe you should be looking at utilising ISAs and other assets first.”
5) Don’t rush!
Retirement now constitutes a huge financial decision – employees must spend time thinking about it, and as the PLSA advises, not rush into a particular product.
As well as making an ill-informed decision with potentially damaging tax implications, rushing into a split-second decision plays into the hands of the worrying number of scammers who will gladly take your pension from you…never to be seen again.
“A lot of people think that six months before they retire is enough time to start planning, and then they have to make a decision and commit before they’ve had a chance to think through their options,” says The Pensions Advisory Service’s Riley.
“Take your time, think about retirement a few years out, and book a Pension Wise appointment.”
CASE STUDY: Helping staff to choose
Transport company FirstGroup is helping its employees make the right retirement decisions.
“We try to educate our employees, particularly thinking about what they need to live on,” says John Chilman, group reward and pensions director. “Then we run seminars around pre-retirement – in particular about the taxation rules.”
The company considers retirement planning to be a ‘partnership’ with their staff. With a varied workforce, they have taken a different approach to demographic segmentation around the level and type of pension members have.
Chilman plans to open a wider conversation about choice, as he suspects that people will want flexibility but with the same kind of guarantee offered by an annuity.
“We’re considering moving to a preferred supplier for advice, so we can brief them on our pension structure,” he says. “They’ll then be able to provide greater insight when speaking to individuals.”