Employees are often ill-prepared for the complex retirement challenges that lie ahead with many struggling to understand essentials such as tax, inflation risks or how investments and retirement income products work. As more and more people retire on defined contribution (DC) savings alone, this could spell retirement disaster: the potential cost of ill-informed decisions could easily amount to millions of pounds of lost income in the next decade alone.
While careful shoppers watch every penny in the supermarkets, they often struggle to understand charges, risks and value for money on financial products. Indeed, some employees simply bury their head in the sand when it comes to retirement planning. Unless user-friendly information on pension and retirement choices is readily available throughout their working life, the non-engaged employee will face a rude awakening when he or she ceases working, facing a myriad of confusing options at retirement, with future income at risk.
The Pensions Policy Institute (PPI) Report Supporting Later Life emphasizes the huge retirement planning gulf that needs to be bridged. It found that among those aged 50 to 59, only around half (53%) say they have hopes or ambitions for their later life, 22% say they have some ideas but have not thought about it that much, and the remaining quarter (25%) have not really thought about it at all. And among those aged 55 to 64 who have a DC pension pot, over a third (35%) have yet to decide on how to convert this into an income.
Not only do today’s employees have to choose from more complex options than previous generations, they are also likely to live longer, which means their retirement income has further to stretch. They also experience a more diverse range of later life trajectories according to the PPI report.
Some of the inertia and indecision stems from behavioural biases which can act as a barrier to effective and timely later life plans. People tend to fear ageing and associated health declines while a low level of trust in the pensions industry can also deter action.
The PPI report found that numeracy levels, which are closely linked to financial capability, are also low as are engagement with and understanding of pensions.
This is not surprising given that pensions have not been the most engaging or exciting of topics in the past, despite often being the second most valuable benefit an organisation provides to employees after salary. However, the fact remains that employee engagement is fundamental to retirement prosperity and many employees need to save more before it’s too late. Employers should be working hard to engage them, otherwise people will continue to struggle with making short or long-term financial decisions and fail to understand their pensions and their options at-retirement. Rather than leaving this, employees need financial education early on in their careers so they understand the value in starting to save for retirement well in advance, and the huge difference it can make to the amount of income after leaving work.
The bottom line is that pensions and retirement savings do not have to be complicated, as long as the right support is available.
Providing access to financial education, guidance, and regulated financial advice can help employees throughout their career, especially at-retirement. It can also encourage them to look more holistically at all their finances, not just their pensions, to ensure that informed choices are being made across the board that will help establish a more stable future.
Many workplaces are seeing the benefits of bringing in specialist providers to help support employees; this should lead to a workforce that is better equipped to deal with the many financial issues that they may face throughout their working life, and importantly at the crucial point of accessing their retirement savings, leading to improved outcomes for all.