WEALTH at work’s latest poll has found that 95% of respondents believe that it is becoming increasingly important to provide financial education and guidance to employees who are approaching retirement.
Jonathan Watts-Lay, Director, WEALTH at work, comments;
“Pension pots and retirement savings are often the most money many employees will ever have access to, so it’s great that so many employers are recognising the increasing importance of providing support for their retiring employees.
Pension scheme members now have to grapple with a multitude of risks which have become increasingly complex and uncertain.”
He explains; “Employers play a key role in ensuring that employees make informed choices at the point of retirement. Financial education and guidance are imperative for employees to help them to understand their options and any red flags to look out for.”
For example this could include:
- Paying more tax than needed – Usually the first 25% of a pension can be taken as a tax-free lump sum, with the remaining amount assessed for tax when it is taken. Many individuals reaching retirement are aware of this tax-free amount and are keen to draw it straight away. However, those with no immediate plans for the money could be paying more tax then needed had they taken another approach. An alternative strategy could be to draw lump sums each year that are made up of a 25% tax-free amount, with the rest assessed for tax. The tax-free cash entitlement is then taken gradually over a number of years, rather than as a single lump sum. For example, an individual could draw £16,760 this tax year, of which £4,190 (25%) is a tax-free lump sum. The remaining £12,570 would maximise the use of their Personal Allowance and would also be free of any tax. Each individuals’ circumstances are different, and may include other income sources, however variations of this approach can create tax saving opportunities for many people.
- Underestimating how long retirement savings need to last – Our research found that nearly a third (32%) of workers approaching retirement (age 50+) are worried about running out of money in retirement. The increasing shift from defined benefit to defined contribution pensions has the effect of transferring both investment risk and longevity risk to individual employees. As noted in PARC’s latest report, not only do employees now have to make investment judgements to determine what their pensions will be worth, but they also have to work out how long they might need them for. It points out that the Organisation for Economic Co-operation and Development has noted that many people will get this calculation wrong. The report also highlights that this unfortunately means that on average, individuals will outlive their money by between eight and 20 years.
- Losing money to pension scams – Last year, The Pension Scams Industry Group estimated that £10 billion had been lost by 40,000 people to pension scams since 2015. Defined benefit pension transfers are a particular area of concern. According to XPS Pensions Group’s Scam Flag Index, almost two in three (65%) pension transfer requests raised at least one scam warning flag in February which is a 12 month high.
- Not shopping around – In 2020/21, nearly two-thirds of individuals (61%) bought their drawdown plan from their existing pension provider, rather than shopping around. This is the highest level since pension freedoms were introduced and suggests employees could be losing out to a more suitable deal elsewhere, potentially resulting in less money in their pocket each month in retirement. For example, the charges may be higher than alternative options and the choice of investments may not be appropriate for their needs.
Watts-Lay adds; “Some of the UK’s leading employers are using either virtual or face-to-face seminars to help their employees prepare for retirement. Topics covered include the retirement income options available, pension scam warning signs, the affordability of retirement, and how to clear debt and maximise pension benefits and other savings in the lead up to retirement, in a tax efficient way.”
“Additionally, one-to-one financial guidance or coaching sessions could be particularly useful for those who need a deeper level of knowledge around their retirement income options. These could be delivered via a video call or telephone and can really help employees understand what their next steps should be and help them decide if they would like further support such as regulated financial advice.”
He explains; “Carrying out due diligence on providers can make the process far more robust. This should include checking that any financial education and guidance providers are workplace specialists. Due diligence on regulated financial advice firms should cover areas such as; qualifications of advisers, the regulatory record of the firm, compliance process e.g. compliance checks of 100% of cases, pricing structure, and experience of working with employers.”
Watts-Lay comments; “An increasing number of employers are now turning to specialist financial wellbeing and retirement service providers to help their employees improve their retirement outcomes. Taking an active approach and supporting employees with the help of reputable firms, will make the whole process far more robust.”
*Statistics quoted are from a poll carried out on the ‘WEALTH at work’ website and through the WEALTH at work LinkedIn page from July 2021 to April 2022. The poll asked, ‘Do you think it is becoming increasingly important to provide financial education and guidance to employees who are approaching retirement?’ and received 187 responses.