17th July 2018
The Pensions Policy Institute (PPI) has released its ‘Evolving retirement outcomes’ report. The report explores the potential outcomes that may be achieved through different retirement income decisions, and the changes that may need to occur within the industry and wider pensions landscape in order to ensure that these outcomes are positive for as many people as possible.
WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated advice for individuals, was one of the sponsors of the report. Jonathan Watts-Lay, Director, WEALTH at work comments on some of the issues which have emerged from the report.
Understanding around pensions is low
The report outlines that understanding and engagement with pensions is low, even amongst individuals who have already made decisions about how to access their retirement savings. For example, 17% of individuals believe that they can take their entire pension tax-free as cash. Also, a quarter of individuals (25%) who accessed their defined contrition (DC) pension over the last 2 years and had purchased a retirement income product or taken a cash lump sum were unsure of how it works.
Jonathan Watts-Lay, Director, WEALTH at work comments; “The decisions made at-retirement are very important, but freedom and choice in pensions is still relatively new for most people, and as the report highlights, understanding is low. It is crucial that people understand their situation, and what their options are, otherwise they risk making some very bad decisions, such as paying more tax than needed and ultimately running out of savings sooner than expected.”
Take-up of guidance and advice is low
The report acknowledges that whilst the Pension Wise service which offers individuals guidance around their DC pension is potentially very valuable, the volume of individuals using it is low. It also outlined that the take-up of advice is ‘worryingly low’ with more than a quarter (28%) of individuals saying that they have never used a financial adviser and do not plan to in the future.
Watts-Lay comments; “Financial guidance is a crucial tool in educating people about their retirement situation, and the choices available to them. Our experience is that individuals who have accessed workplace financial education and guidance programmes emerge more confident, knowledgeable and more able to make informed decisions. For example, as highlighted in the WEALTH work case study in the report, 61% of seminar attendees took action following a seminar and 30% of these had arranged a meeting with a financial adviser. This shows how guidance can help individuals to consider their options and whether they need to take action such as seeking advice.”
He adds; “The report outlines that advice can help individuals improve their retirement outcomes when making decisions about how to access pension savings. This is because it helps individuals think about their retirement plans more holistically; this means not only thinking about someone’s personal situation but also considering that of any partner and also all assets and savings – not simply pensions, but also ISAs, shares and so on.”
The report also outlines that those who do not take advice are less likely to shop around. For example, among Association of British Insurers (ABI) members, 94% of sales which were made without the individual taking advice were to existing customers. People who take advice are much more likely to move to a new provider, with 65% of advised sales to new customers.
Watts-Lay comments; “The impact of not shopping around is that many could end up with less money in their pocket at-retirement than could have been the case. For example, the Financial Conduct Authority (FCA) found that individuals could increase the income from their pension by up to 13% by shopping around and switching to providers with lower charges.”
Default retirement pathways
The report discusses the view that default retirement pathways (a pre-determined option for disengaged individuals who do not make decisions about how to take income at-retirement) have the potential to improve retirement outcomes for some, but would be challenging to design and implement.
Watts-Lay comments; “In reality, I don’t believe anyone should be defaulted at-retirement without some type of guidance and a proactive decision being made. For example as recognised in the report, if those with multiple pension pots were to default based on individual pots rather than the collective value, the likely outcome for many will be sub-optimal and actually reduce income. Partly because many will end up paying more tax than is necessary or because they haven’t considered their changing income needs throughout retirement.”
Engaging employees in the workplace
The report suggests that engagement with guidance or advice could be improved if it was offered in the workplace, particularly if it was offered at no cost to the employee as part of their benefits package.
Watts-Lay comments; “Responsible employers are now beginning to realise the benefits of using reputable firms to deliver financial education, guidance and regulated advice for their employees. It is a win win for all if employees feel secure when it comes to their finances, especially when it comes to preparing for retirement. The best way to achieve this is by providing employees with the knowledge to make informed financial decisions and therefore producing better outcomes for all.”