Financial wellbeing has become something of a buzzword in the workplace. In general it describes an individual’s perception of how financially healthy, happy and free from worry they are when thinking about their financial situation.
However, whilst there is some great wellbeing practice out there, latest reports suggest that there is a lot to do before we can say that pension scheme members are really getting the support they need to enjoy a feeling of wellbeing, particularly when accessing their pensions.
Concerns for members
Whilst freedom and choice in pensions is popular with individuals, the downside is that it can be easy for employees and members to make poor decisions and a permanent dent in their retirement income. For example, paying more tax than necessary, falling victim to a scammer or making ill-judged investment choices. The evidence on this is clear to see.
Latest figures show that pensioners are paying £4billion a year more in income tax on their pension than what the government had previously estimated, indicating that individuals are often paying tax when it could have been avoided with careful planning.
In fact, our latest research* with the PMI indicates that Trustees have taxation fears for their member’s at-retirement, with eight out of ten (81%) believing that members are not equipped to deal with the taxation implications of accessing their pension.
The research also found that nearly nine out of ten Trustees (88%) fear their members nearing retirement will face predatory attention from scammers. Concerns around this are warranted as the amounts lost to pension scams can be significant. For example, the FCA revealed that victims of pension fraud had lost £91,000 on average each, with some even losing more than £1 million to fraudsters.
It was therefore no surprise to see that almost two thirds of Trustees are concerned that their members’ money will not last the duration of their retirement. But this could also be put down to a number of other reasons including concerns over members making poor decisions at-retirement, not saving enough during their working life, or underestimating how long they will live.
Additionally, the research found that almost nine out of ten Trustees (85%) have concerns on risks their members face if they transfer out of their defined benefit (DB) schemes. DB pension transfer values remain high, with multiples of 40 times income and figures breaching the £1million mark. Whilst this may be very tempting for members, assessing whether it is right to transfer is highly complex with multiple risks to consider around how to manage the money once transferred.
In Caroline Rookes review for the Pension Regulator of the communications and support given to British Steel Pension Scheme members, it was identified that members acted on an un-informed or ill-informed basis, were exposed to unscrupulous advisers and were swayed by the size of the transfer figures rather than the value of the benefit.
Facing the challenges ahead
As all these findings suggest, the financial wellbeing of members is being compromised. But what can be done to overcome this?
We believe that financial education and guidance is the best way to help members understand their different options at-retirement including any potential risks, which in turn will lead to improvements in their financial wellbeing.
Larger schemes are often supported by employer sponsored financial education. However, even the smallest schemes could offer members access to one-to-one financial guidance over the telephone in the months or even years before they access their pensions, as well as facilitating an introduction to a regulated financial adviser who has been through a due diligence process. This is something that Rookes advocates in her report.
Financial wellbeing should be more than just today’s buzzword. Helping members to make informed decisions and supporting good member outcomes are central tenets of the regulatory framework in which DC Trustees operate – and whilst the current regulatory requirements for DB schemes may differ, the principle does not. Good quality and timely financial education, one-to-one financial guidance and access to regulated financial advice are a far better path to financial wellbeing than leaving members to go it alone.
Further coverage can be found in Pensions Expert.