Members are ill-prepared for the risks they face when accessing their pension.

PMI

Pension scheme members approaching retirement are likely to be ill-prepared for the risks they face when accessing their pension, ranging from paying too much tax, to running out of money before the end of their days, or even losing their life savings to scams, according to a new survey of Trustees.

Research conducted by WEALTH at work and the Pensions Management Institute (PMI) investigates the concerns Trustees have for their pension scheme members as they access their retirement savings and what support is provided to help. The research shows that many scheme members may be blissfully unaware of the potential problems ahead.

Some of the key findings include;

  • Nearly nine out of ten Trustees (88%) fear their members nearing retirement will face predatory attention from scammers.
  • Eight out of ten Trustees (81%) believe members are not equipped to deal with the taxation implications of accessing their pension.
  • Almost nine out of ten Trustees (85%) have concerns on risks their members face if they transfer out of their DB schemes.
  • Nearly two thirds (60%) of Trustees are concerned that their members’ money will not last the duration of their retirement.
  • Almost two thirds of Trustees (63%) worry about a lack of engagement from their members.

Jonathan Watts-Lay, Director, WEALTH at work comments;

“Pension scheme members nearing retirement face some unique challenges. The retirement income options open to each member can confuse and bewilder even the savviest person and leave them open to an array of risks.”

He warns; “As the findings show, a vast majority of Trustees fear their members nearing retirement will face predatory attention from scammers. After all, a lifetime’s savings can be lost in a moment with highly plausible fraudsters persuading members to move their retirement savings into unregulated high-risk or bogus investments that could result in them losing their entire pension. The amounts lost to pension scams can be significant with the FCA revealing that victims of pension fraud had lost £91,000 on average each, with some even losing more than £1 million to fraudsters.”

Watts-Lay adds; “Trustees also have taxation fears for their member’s at-retirement. They are right to be concerned about this as there are a number of ‘tax traps’ that pension scheme members need to be aware of when accessing their retirement savings – all of which can have a material impact on income levels. These can include moving into a higher marginal income tax rate when cashing in DC pension pots, triggering the Money Purchase Annual Allowance, or losing out on the ability to pass a pension inheritance completely free of tax.”

He comments; “These risks also equally affect defined benefit members who are considering transferring their pension. Indeed, the majority of Trustees in our survey have concerns over this. Assessing whether it is right to transfer is highly complex with multiple risks to consider around how to manage the money once transferred including: market volatility, inflation and taxation issues and running out of money too soon. The decision once taken is irrevocable.”

Watts-Lay states; “When we consider the risks that Trustees are worried about, it’s unsurprising that so many are concerned that their members’ money will not last the duration of their retirement. But this may also be due to a number of other reasons including members not saving enough during their working life, or underestimating how long they will live in retirement.”

Lack of support despite fears for scheme members

The survey found that despite the fears that Trustees have for members, just over one third (35%) provide financial education for their members. Nearly two-thirds (61%) of Trustees indicated that their schemes do not provide or facilitate one-to-one financial guidance for members at-retirement. Just one in five (21%) Trustees are providing or facilitating regulated advice for their members at-retirement.

Watts-Lay comments; “These findings indicate that pension scheme members coming up to retirement are likely to be ill-prepared and blissfully unaware of the potential problems ahead when accessing their pension, and perhaps suggest why the majority of Trustees worry about a lack of engagement from their members. Unless more support is provided, it’s likely that many members will make poor decisions at-retirement.”

He adds; “Financial education and guidance is an excellent first line of defence to help members understand their options at-retirement and avoid many of the risks that Trustees are concerned with such as scams and tax mistakes. As well as providing individuals with a plan tailored to their needs, regulated advice can also provide members with added consumer protection for the advice given and can prevent them from making costly mistakes.”

Watts-Lay concludes; “Our report suggests that all these concerns and risks could be mitigated by providing more support for members at-retirement which includes offering financial education, guidance and access to regulated advice, as well as helping members to implement their chosen retirement income option(s).   An increasing number of Trustees are now turning to specialist retirement service providers to help their members navigate the maze of options at-retirement. This provides an efficient way for schemes to offer their members access to reputable providers who have undergone due diligence, rather than leaving them to go it alone. After all, providing support for members is vital if they are to optimise their income and achieve good outcomes at-retirement and beyond.”

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