Helping employees and members to achieve financial security in retirement is no longer just a ‘nice-to-have’ but is now an essential offering. This is because we are seeing increasing evidence that leaving employees and pension scheme members to their own devices at-retirement can lead to them making costly mistakes.
One of these mistakes includes inefficient tax planning. Our poll revealed that 91% of employers believed that employees do not understand the tax rules when withdrawing pension funds, and research by an insurance provider found that over a quarter (27%) of individuals over the age of 55 didn’t realise that they have to pay tax on at least some of their pension income. This lack of awareness perhaps suggests why the Office for Budget Responsibility reported that revenues raised from the pension freedoms last year will be 50% more than forecast and indicates that individuals are often paying tax when it could have been avoided.
Another major risk employees and members face is the devastating effects of being scammed out of their retirement savings, with the FCA revealing last year that victims of pension fraud lost £91,000 on average each.
Many employers and Trustees are now realising that supporting employees and members at-retirement is vital if they are to optimise their income in later life – but aren’t quite sure where to start with it all.
We have therefore listed 4 key steps that employers and Trustees can take to help.
- Provide financial education and guidance
The first step is to provide employees and members with financial education and guidance. This can help them to gain a fuller picture of their sources of retirement income, understand the tax implications and what to look out for when it comes to pension scams.
We find that seminars are a very effective method of improving understanding. This is based on the analysis of hundreds of thousands of responses from seminar attendees who have rated their learning from such interventions. To explain all of the choices and the implications of these, employees and members really need face-to-face interaction, so that they can understand all the different aspects of their retirement savings. This can be supported with helplines and interactive tools and modellers following a seminar.
Financial education also acts as a prompt for action, as it can help individuals to think about their next steps, including being able to consider all the things that they may not have thought of before, such as being able to decide if they need further support in the form of regulated financial advice.
- Promote the importance of regulated financial advice
Many people are concerned about the cost of regulated financial advice without realising that it could actually save them money in the long run. Studies have shown that those who take financial advice are more likely to increase their wealth than those who do not. For example, the International Longevity Centre revealed in ‘The Value of Advice’ report that those who receive financial advice are on average £40,000 better off than those who don’t.
As well as providing individuals with a plan tailored to their needs, regulated financial advice also provides the benefit of added consumer protection for the advice given and can prevent individuals from making costly mistakes. Employers and Trustees should therefore make sure that their employees and members understand the importance of regulated financial advice.
- Help employees and members to implement their options
The next step is to ensure that employees and members can implement their chosen retirement income option(s) – whether that is an annuity, income drawdown, cash withdrawal or a combination of options. As individual needs change over time, support will also be needed throughout retirement.
- Bring in a provider
An increasing number of employers and Trustees are now turning to specialist retirement service providers to help achieve good outcomes at-retirement. Taking an active approach and supporting employees and members with the help of reputable firms, will make the whole process far more robust, as well as helping them to make the most of their life savings.