Important Choices.

30th September 2015

The most radical pensions overhaul in nearly a century is almost half way through its first year.  The pension changes promised to offer employees in Defined Contribution (DC) schemes who are aged 55 or over, greater flexibility in accessing their pension savings.

With these freedoms come new options to consider and important decisions to be made which have lifelong consequences for pension savers.

For example, before the pension freedoms when annuity purchase was the main option available, life cycling was something that may have required little thought or consideration.  However, now that many options are open to pension scheme members employees must consider their ‘glide path’.  This is the investment route that will take an employee / scheme member up to the point of retirement and potentially beyond.

However, our experience shows that employees find selecting funds for their pension confusing, and most choose to invest in the default fund provided by their workplace pension.  Many companies realise that purchasing an annuity will now not be the choice made by many and consequently will want employees to look at their glide path up to ten years before their anticipated retirement date, so that it is aligned with their chosen retirement income option. Yet, research by WEALTH at work shows that 58% of employers believe that their employers are unaware of the various retirement income options available to them – so how can we expect employees to make a choice about something that they aren’t equipped to understand?

This is where financial education can help, as it can explain the advantages and disadvantages of retirement income options such as annuities, drawdown, or a combination of options. Employees should then have confidence about what to do next to help them to make a choice about their favoured retirement income option and therefore, select an appropriate glide path to suit this.

But it doesn’t end there as it’s not just about pensions! Employees now have to think beyond pensions and consider all savings such as ISAs, share schemes and any deposit accounts because tax efficient withdrawal of cash from pensions or any other savings to use in retirement, should be an important consideration.