8th February 2016
Whilst the pension changes are good news, without financial education and advice employees are vulnerable, not just to the headline grabbing scams, but to paying unnecessary tax, using the wrong assets for income in retirement, and ultimately not making the right decisions.
The Pensions and Lifetime Savings Association research of over-55s shows that people do need advice. Over half (52%) of those who expressed a preference for how they were going to access their pension savings thought drawdown would provide a guaranteed income, almost a quarter (23%) thought income drawdown was risk free and a quarter (25%) of all respondents thought their whole pension was tax free. This lack of understanding is worrying, and if people truly believe drawdown will provide a guaranteed income, this is perhaps why only one in five said they are willing to pay for advice.
The government does provide a free guidance service, Pension Wise, to help with the pension changes, but it only looks at defined contribution (DC) pensions – so not final salary pensions or other types of savings. This is far from a holistic approach, where employees may need to think about a number of different savings and investments such as ISAs, deposit accounts and shares.
One solution which has been discussed is the introduction of robo advice. Robo advice is really just a sophisticated self-selection tool. It isn’t widely available at-retirement yet, but may be soon. Most robo advisers offer a range of portfolios divided into risk levels. Investors are asked a series of questions to establish investment goals and attitudes to risk, and the system will then suggest investments which might be suitable for that individual.
There is a place for it for employees who are saving and want to make simple investment choices. However, with much hype surrounding the proliferation of robo advice there are several reasons why employees who are approaching retirement need to be wary.
With so many things to get right, preparation and taking time to make the right decisions is critical. Poorly thought out decisions can be very costly, so taking full regulated advice could save employees money in the long run!
Further coverage can be found in REBA and Employee Benefits.
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