Employees must make right decisions

3rd July 2013

Jonathan Watts-Lay, Director, WEALTH at work comments in Workplace Savings and Benefits “Generally, many people are living for longer which is great news! However, with the removal of many defined benefit (DB) schemes in favour of defined contribution (DC) schemes, the onus now falls to employees to consider their pension contributions, monitor their pension savings and of course, choose the most appropriate retirement income option at retirement. These decisions are very important to ensure sufficient income in retirement.  However, more often than not, many employees are left without any guidance at the point of retirement – just when they ‘really’ need it.

I consider that choosing the most suitable retirement income option at retirement, is probably one of the biggest financial decisions, if not the biggest financial decision, anyone will ever make in their life and a wrong decision could have devastating consequences to their personal finances in retirement. As a poor financial choice made at retirement can often impact an employee’s income level throughout their retirement, resulting in the loss of thousands of pounds of income during retirement after what may have been 40 years of saving.

Dr Ros Altmann, leading pension expert commented on this at a recent Retirement Challenges event held by WEALTH at work in London on 25^th April 2013. She comments, “Because most workers don’t know how to assess their income options by themselves… far too many end up making the wrong decisions. They really need help and advice. They need somebody to talk through with them financial reality.”

She continues, “The consumer simply doesn’t know that they don’t know all sorts of things they need to know to help themselves have a decent chance of a good income in later life. They have no real idea about long term financial planning. The whole retirement income space has changed radically. They (employees) are now finding they have to make all sorts of choices and decisions themselves which they are not equipped to make. That’s where the role of the employer and especially good large employers is so crucial. Because the employer can help them by facilitating and providing information and advice that they so much need.”

Recent figures show that half a million people will buy an annuity this year*. It is also stated that 85% say they need help**and unlike other financial decisions, they may get just one chance to get it right.

Dr Ros Altmann also comments, “Annuities are not an ideal product for 21st century later life lifestyles.” She goes on to explain, “The standard annuity gives you no protection against inflation. That is a big issue. No protection – if you happen to buy now when rates have been artificially forced down so that we can stimulate the economy, you’ve locked in for life. If rates go back up again and you’ve bought today, you have no chance of getting a better deal later.”

Of course annuities are not the only option. I think it important an employee considers all their options such as; an annuity, income drawdown or a combination of both including phased retirement. They need to understand the advantages and disadvantages of all retirement income options to be able to make an informed decision.

From a recent retirement survey conducted by WEALTH at work amongst some of the largest companies in the UK*** it was revealed that employers believe that only 18% of employees are aware of the various retirement income options available and as few as 13% are aware that they no longer have to purchase an annuity.

This evidence suggests that a solution must be provided to employees to ensure they understand what their retirement income options are and how to maximise their income as much as possible.

It also seems that the end of fixed retirement dates will see many employees continuing in employment for longer, often opting for flexible retirement where retirement income is supplemented by earnings from part-time work.

Therefore, it is unsurprising that the recent research*** also revealed that 71% of employers believe there will be an increased requirement for specialist advice at retirement. This is of course essential when considering retirement, whether or not an employee continues to work in a part-time capacity or chooses to retire completely.

It is no wonder that many employers now see professional retirement planning for their employees as critical to their business. A combination of both financial education and specialist advice is especially crucial to understand all retirement income options to ensure that employees don’t lose out on potential retirement income in the future. Retirement Income Option education and advice must now be a core provision for any company running a DC pension scheme.”

* Ros Altmann website

**PMI/ NAPF – Treating DC scheme members fairly in retirement

***WEALTH at work Rethink Retirement Survey – December 2012