Support for guidance pathways at-retirement is growing.

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WEALTH at work

By Jonathan Watts-Lay, Director, WEALTH at work

Over the past few weeks the support for guidance pathways at-retirement has really grown.  Speaking at the Personal Investment Management and Financial Advice Association annual conference, the Treasury Select Committee Chair Nicky Morgan has called for the introduction of default guidance before individuals are allowed to access their pensions.

This stance was also supported by a recent poll by WEALTH at work which found that 86% of respondents believe that employees should not be defaulted into a decumulation pathway at-retirement without financial guidance.

employees should not be defaulted into a decumulation pathway at-retirement without financial guidance. - 86%

These findings are not necessarily surprising as defaulting individuals into something without any support or guidance raises questions over whose best interest it’s in. Many will argue that it’s a win for the provider because they keep hold of the member’s assets but it may not be a great option for the member.

Not only this, there’s a danger that Freedom and Choice in pension will be destroyed if individuals don’t make active choices at-retirement. It also discourages shopping around, which again suggests the winners are the providers. Additionally, as many retirees will have more than one pension, if they all default based on individual pots rather than the collective value, the likely outcome for many will be sub-optimal and less income at-retirement.

Before any decisions are made at-retirement, individuals really need to understand what their options are and the generic advantages and disadvantages of these options. So to default member’s at-retirement, without them really understanding what they are defaulting into, could lead to many retirees ending up with less income in-retirement than they could have achieved if they had made an informed decision.

Latest insights are a worrying sign that many individuals don’t understand the implications of accessing their retirement savings. Reportedly, over a quarter (27%) of individuals over the age of 55 don’t realise that they have to pay tax on their pensions if they take the money as cash, and the FCA found in the last report of its Retirement Outcome Review series this year that 62% of individuals in drawdown were not sure, or had only a broad idea, where they were invested.  Coupled with this, the Office for Budget Responsibility has recently reported that revenues raised from the pension freedoms this year will be 50% more than forecast, suggesting that individuals are often paying tax when it could have been avoided.

individuals over the age of 55 don’t realise that they have to pay tax on their pensions if they take the money as cash. - 27%
individuals in drawdown were not sure, or had only a broad idea, where they were invested. - 65%

Providing financial education and guidance for members and employees at-retirement can help with this and will enable able them to make informed choices, including being able to decide if they need to further support such as regulated advice – and therefore lead to better outcomes.

Our experience is that following financial education and guidance, individuals emerge more confident, knowledgeable and more able to make informed decisions; it has been no surprise to see significant numbers changing their retirement plans, increasing pension contributions and seeking out regulated advice as a result.

Therefore, we are calling for the pensions industry to take note and before more defaults are created ensure more effort is made to make financial education and guidance the norm.

Further coverage can be found in Pensions Age.

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