The recent ‘freedom and choice’ reforms for pensions were put in place to give employees more flexibility about when and how to access their pension savings. This is all very well, but without proper knowledge and preparation, how are your team members able to make the best decisions for their financial wellbeing in old age?
According to recent research, 64% of UK employees would like their employer to help them plan for retirement. Increasingly, employers are realising that they can and should play an important role in providing valuable support to their staff on this matter. What’s more, it’s not simply a case of organising the odd information meeting – it’s a service that should be available throughout an employee’s working life.
When do employees need pensions and savings advice?
The early career stage is when good savings habits are formed. Young employees need pertinent advice on pensions including a basic introduction to the state pension, as well as other savings vehicles such as ISAs or share schemes. What is available? How do they operate? What are the tax implications? How do they relate to different personal circumstances?
Mid-career employees will hopefully have a solid pension plan in place but may need a check-up to see whether they’re nicely on course towards their retirement goals and, if not, how to get back on track. They may also need a refresher on the different retirement income options available to them.
Those approaching retirement age, say in the last 10 years before they plan to stop working, will be looking for tactical advice on when to take retirement and the income options that are most suitable based on their individual situation.
What pensions planning support can employers provide?
It is clear that employers can make a valuable contribution to provide pensions and retirement education and guidance, implementation and management services at every stage of their team members’ careers. It’s a holistic service that should help to ensure the right income as needs change over time.
Many workplaces now provide expert support to their employees in terms of professional financial education, regulated advice and guidance along the lines explained below. Putting company resources behind workplace financial education programmes leads to team members being able to make informed choices over time that will lead to better outcomes in retirement.
- Help your employees to make a realistic plan
Some basic budgeting advice will go a long way to help draw up a financial forecast for how much retirement income will be needed to meet daily living expenses and other outgoings that may well change over time. Are there enough assets, savings and investments available to meet these needs? And with life expectancy rising, this must also be taken into account when employees are doing their sums.
- Provide information on retirement income options
Defined Contribution pensions can be accessed in different ways – buying an annuity, taking a cash lump sum, through income drawdown, or a combination of any of the above. However, there are complexities associated with each of these options that must be fully understood in order to make an informed choice. Employers are ideally placed to provide essential information and guidance.
- Explain the tax rules and implications for retirement income
Different tax treatments apply depending on how money is withdrawn from a pension. However, this is a complex topic and most employees won’t fully understand the tax rules around retirement income. Without careful tax planning, they may find themselves paying more tax than needed. This is where employers can make a tangible difference, offering professional tax advice which will save their team members money.
- Offer guidance to find the best pensions deal
Private pensions is a competitive market and in order to get the option that best suits the individual’s needs, it’s important to shop around. The Financial Conduct Authority (FCA) found that those choosing income drawdown were able to increase their annual retirement income by more than 10% simply by switching to a lower cost provider. Targeted financial advice is essential to get access to the right income amount at the right time and for as long as it is needed.
- Raise awareness of pension scams
It is a sad and sorry state of affairs that over £2 million were lost to pension scams in 2021. The importance of understanding the risk of scams and how to protect oneself cannot be overstated. Knowledge is power and an awareness raising campaign for your employees, while reinforcing the importance of only ever dealing with FCA authorised companies, could make all the difference to achieve a comfortable retirement.