27th April 2016
Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice, covers reasons why employees who are approaching retirement should be aware of robo advice.
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.
However, it seems many individuals don’t really understand the options they now face at retirement. Survey findings from The Pensions and Lifetime Savings Association research found that 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 defined benefit 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.
Almost one year on, there has been little innovation in the market in terms of new retirement products. However, many are expecting an influx of offers now that the market has had time to adapt. 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, when we consider that employees are struggling to understand their options since the pensions changes and with even more changes ahead which may add further confusion, is robo advice really going to be the right solution for those approaching retirement? With all this hype surrounding the proliferation of robo advice there are several reasons why I believe 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. As we know the pension changes demand a holistic approach to retirement. I believe that the best approach is to have a well thought out plan rather than simply going through a robot to be sold a one off retirement product as a source of retirement income. The consequences of not understanding all options could result in poor outcomes. Employees need to understand what their retirement options are and the consequences of them.
Employers need to take action by making financial education a priority for employees so that they understand their options and the implications of their decisions in the lead up to, and at the point of retirement. Financial education can develop employee knowledge of the various retirement choices available. I believe the ideal is to provide a full service for employees in the workplace: financial education, to help them understand the pros and cons of each retirement option, followed by regulated advice to provide individual support which can save employees money in the long run as poorly thought out decisions can be very costly. Finally, employees should be able to implement their retirement plans whether they decide to buy an annuity, go into drawdown or simply make cash withdrawals in a tax efficient way.
Further coverage can be found in REBA and Pensions World.
Links to websites external to those of Wealth at Work Limited (also referred to here as 'we', 'us', 'our' 'ours') will usually contain some content that is not written by us and over which we have no authority and which we do not endorse. Any hyperlinks or references to third party websites are provided for your convenience only. Therefore please be aware that we do not accept responsibility for the content of any third party site(s) except content that is specifically attributed to us or our employees and where we are the authors of such content. Further, we accept no responsibility for any malicious codes (or their consequences) of external sites. Nor do we endorse any organisation or publication to which we link and make no representations about them.