Three steps to greater pension flexibility

17th December 2014

Jonathan Watts-Lay, Director, WEALTH at work, speaks to Workplace Savings & Benefits about how employers can help their staff get the most from their pension options.

“The Budget changed the face of retirement options for members of defined contribution (DC) schemes, with perhaps the most radical pension proposals of our lifetime. The new pension changes will come into force from April 2015 and remove many restrictions on how pension benefits can be taken from age 55.

As April fast approaches, many employers are not prepared for what will bring a whole new world of choice on how to generate income in retirement. And it’s not just about pensions – all savings will need to be taken into account (such as ISAs) if retirement income is to be properly considered.

This greater flexibility to decide how to take income from pension savings is fantastic news for savers, but without the right financial education and advice, employees could be left incredibly vulnerable to making poor decisions.

On April 6^th, pension managers, pension schemes, insurance companies and pension scheme trustees may be anticipating a huge number of enquiries about how to access current and deferred funds and the consequences of that.

Will the Guidance Guarantee really be enough to help employees?

Will it help to avoid taxation issues and the limitations of the new annual allowance, or aid understanding of their existing Defined Benefit (DB) or DC scheme rules to make good decisions about what to do next?

And of course, will it be in time to stop employees from calling pension departments to ask what the answers actually are?

By itself, the Guidance Guarantee may be too little too late for many potential retirees as there is the proposed obligation to signpost DC members to guidance between four to six months before their intended retirement date.

To ensure employees are properly informed, not just at the point of retirement but in the years leading up to retirement and beyond, we believe they will typically have 3 key questions;

Firstly, employees will ask – ‘What do I need to know?’ such as ‘I have heard I can take money out of my pension as long as I’m 55 so what are my options?’

This question could be from those who are looking to retire but also from those who want to carry on working but release some cash from their pension; whether that is to splash out on a holiday or perhaps repay some debt. Financial education is key to this as it will ensure employees understand the advantages and disadvantages of all the options available, whether they are retiring or not. Many employers are putting in place rolling financial education programmes for employees from age 45 to ensure they understand the options and have plenty of time to plan their eventual retirement.

Secondly, employees will ask – ‘Okay I understand the options now but what is right for me?’

This question is likely to arise as employees realise that their decision will have many implications ranging from the tax they will pay on any withdrawals, through to broader considerations such as other pensions or savings they may have and indeed potentially those of a partner. Equally, if they are retiring it is important to understand whether drawdown, annuity or a combination of approaches are the most appropriate way to generate income in retirement. Individual guidance and support is of paramount importance here and should include the availability of both helpdesk support and fully regulated advice.

Further questions can be answered such as, ‘Should I take cash from my pension before retiring? Should I retire now, delay retirement or work part-time? And how should I take my income?’ Of course those considering transferring a DB pension to a DC pension in order to have control over their ‘pot’ will have to get regulated advice as this is a stipulation of the proposed rules.

Overall it is important to remember that there is significantly more consumer protection offered by taking regulated advice rather than by ‘doing it yourself’. The right informed and impartial advice is necessary if these reforms are to be effective.

And finally, employees will ask – ‘How do I do it?’

Employees will need to manage their retirement income in line with their requirements; whether that is leaving their pension alone and taking income from another source such as ISAs or taking some form of drawdown, buying an annuity or a combination of options. Many employees may want to make a series of decisions over time rather than a single choice at retirement. Therefore employers need to consider what services they will make available to ensure employees can execute their chosen option(s).”

For further information on Workplace Savings and Benefits please click here.