Financial education can lead to a more prosperous life in retirement.

26th September 2015

The pension changes have introduced a level of flexibility and choice in a way that defined contribution (DC) pension schemes have not previously seen. This has had far reaching consequences for pension savers, bringing more complexity and risk to the decision making process in the lead up to and at the point of retirement.

Retirement decisions to be made earlier

For example, an area which is a cause of concern in the lead up to retirement is that many pension investments are still set up to prepare for an annuity purchase which may no longer be appropriate.

The issue is that many people make no active investment decisions for their pension, and therefore end up in a default ‘lifestyle fund’. What most of these funds have in common is that around 10 years before an individual retires, they tend to slowly move assets out of equities into safer investments like bonds and cash.

This is a good move if you want to buy an annuity, and don’t want the risk of your fund suddenly plummeting as you retire, but might not be the best strategy if you are planning to choose income drawdown, where you are likely to benefit by keeping more of your assets in equities.

Therefore, many people could be heading towards retirement not knowing that their assets are being prepared for an annuity purchase, when this may not be what they want.  Hence, individuals need to check how their fund is being invested in the 10 years before their planned retirement date, to ensure they are invested in a way which is appropriate to how they are planning to take their retirement income – whether this is taking their whole pension fund as cash, buying an annuity, going into drawdown, or a combination of some or all of these options.

But as most individuals are not financial experts and some may even only have basic financial knowledge, how can they be expected to make a choice about something that they may not be equipped to understand?

Thinking beyond pensions

The pension changes have not changed the income options available to individuals. But what has changed is that those with defined contribution schemes who are age 55 or over now have full access to their pensions, generating greater power over how they spend, save or invest their retirement savings.

And it’s not just about pensions! Individuals now have to think beyond pensions and consider all savings such as ISAs, share schemes and any deposit accounts as potential retirement income, to establish a tax efficient strategy to provide a sustainable income during retirement. It’s therefore important for individuals to understand their retirement income options – but where do they start?

Financial education is key

In our many years of experience, we believe that delivering financial education in the lead up to retirement is essential.

It is especially relevant now that individuals are expected to make retirement decisions 10 years before their anticipated retirement date.  It is crucial for savers to understand the advantages and disadvantages of all retirement income options, to have the confidence to make what could be life changing and irreversible decisions.

Financial education doesn’t replace financial advice, but it does help individuals to understand why it is important to take an interest in their finances.  Changes to how much is saved, and into what saving vehicles can make a big difference to the overall level of income achieved at retirement.

With more choice available, it is important for individuals to understand their retirement income options. And of course, many individuals will also need personalised support to make important financial decisions.

By ensuring individuals go through a process of learning so that they are more likely to make good financial choices, much of the confusion around generating an income in retirement should be eradicated, helping to lead to a more prosperous life in retirement.

Further coverage can be found in Money Observer.

For further information, please contact us now.