Blindly selecting drawdown products putting employees at huge risk of making costly mistakes.

Money Feature

Latest findings from the FCA indicate that since the pension changes, twice as many pension pots have moved into drawdown than annuities. The proportion of drawdown bought without advice has risen from 5% before the freedoms to 30% now, and the vast majority (94%) of people who went into drawdown without taking financial advice, accepted the drawdown scheme offered by their existing pension provider.

Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, believes that financial education and advice is key to helping employees make informed choices about their pension drawdown scheme.

Watts-Lay comments; “The ramifications of people failing to understand the retirement choices available to them and, as a result, blindly selecting the wrong product for their life savings is a huge problem.

For example, employees need to know that there could be a difference of up to £10,000 over a decade between the most expensive drawdown provider versus the cheapest, according to research by consumer group, Which?

It is crucial that employees shop around to ensure that they select a retirement option that best suits their needs. This means finding a solution that enable them to access the right amount of cash as and when they want it, and for as long as they need it

For example, a 65-year old man now has a 50% chance of living to 87 and a woman of the same age has the same chance of living until she’s 90, so employees need to understand that making their retirement savings last is key.”

He continues; “Too many drawdown products have been bought without financial advice, which puts employees at huge risk of paying too much tax. Employees need to make sure that their selected option is as tax-efficient as possible in order to maximise their retirement income.

But it’s not always easy for employees to understand the decision-making processes involved. It can be confusing trying to understand the often overly complex structures and fees of drawdown schemes, let alone decide which one best suits their needs.

Very few employees have the specialist skills required to undertake this evaluation, let alone manage the investment risks involved, which is why I wholeheartedly agree with the financial watchdog, the Financial Conduct Authority, that poor choices can mean individuals miss out on investment growth, being exposed to investments that are too risky for them or running out of their pension savings sooner than expected.”

Watts-Lay adds, “Uninformed employees are taking risks with their hard earned savings by blindly selecting retirement products with little, if any, understanding of their choices. They are also easy targets for fraudsters attempting to scam them out of their life savings – situations that we want to avoid at all costs.

Research suggests that between April and June this year, more than a fifth of individuals over the age of 50 were reportedly targeted by potential scammers offering unsolicited pension advice or investment opportunities.

The fact that almost nine in 10 (88%) individuals selected a bogus pension’s advice offer when shown a mock advert means that it’s time for the financial industry, together with employers, to tackle this serious issue head on and educate and support employees so that they can fully understand all their options at-retirement.”

He concludes; “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. This should then be followed by financial advice to provide individual support, which can save employees money in the long run as poorly thought out decisions can be very costly.”

IMPORTANT – External links please read: Virus status

*Contents of links to external websites
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. 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. Nor do we endorse any organisation or publication to which we link and make no representations about them.

Investment decisions
Please note that the content of this website including any external articles to which it links are not financial advice and must not be relied upon to make investment decisions.  Further, please note that investments can fall as well as rise and that if investing you may get back less than you originally invested.

Subscription only sites
Where we have been quoted in an article or we are the authors of an article held on a third party website we may provide a link to that site, even though it is a subscription only publication.  Please note that by doing so we are not advertising the subscription nor are we suggesting that you should subscribe. We are merely providing a link for those people who already have a subscription should they wish to read the article. If you do not have a subscription then often only the first lines of an article may be available to read. You should not rely on that limited content to form a view of what the whole article may say or conclude. Often a headline or an excerpt of an article are not representative of the article in full. Reading a part only and/or out of context may be misleading and must not be relied upon.

20 Shares