By Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace
Hoping for the best is not the most effective way to ensure that an individual’s retirement income will be adequate, and employers can help their staff to become more involved in putting money aside.
Making sure that employees are supported at retirement is vital if they are to optimise their income in later life. Expecting employees to rely on passive information in a brochure or company intranet doesn’t even tick a box.
We see increasing evidence that abandoning employees at-retirement can lead to them, at best, receiving less income than perhaps they could have achieved and at worst, getting scammed. While this might sound extreme, feedback from organisations, such as The Pensions Advisory Service (TPAS) shows that scams are rife.
Employees often fail to optimise their retirement income due to the lack of understanding of the options available to them, coupled with a lack of workplace support. A big aspect of financial planning is minimising the amount of tax that an individual will pay on their income in retirement. There are very different ways in which this can be calibrated. For example, someone could have an income of £20,000 a year from different sources and pay no tax e.g. a mix of pension, ISA and other savings – but if all of that £20,00 comes from a pension, that would incur income tax.
But it’s almost impossible to equip someone to make these types of decisions simply by directing them to a generic information pack. Instead, there’s a four step approach that employees and employers can take which is much more effective.
Steps to success
The first step is to provide employees with financial education and guidance. This can help them to gain a full picture of their sources of retirement income, understand the tax implications of how their retirement income is structured, and to look at bigger picture considerations such as health and longevity, and explore their options. Financial education drives the second step in the process: taking regulated advice.
Research by the Pensions and Lifetime Savings Association found that since the pension changes, of those surveyed who had accessed their defined contribution pension, 73% had not sought advice from a financial adviser. Poor take-up of regulated advice is often blamed on the fees charged or indeed the ability to access regulated advice for those with smaller pots.
However, our experience of delivering financial education in the workplace increases the request for regulated advice to around 60%.
We believe there are two reasons for this; firstly the advice provided is only paid for if the employee wants their recommendation implemented, at which point they know the exact cost; and secondly, they can make a ‘value’ judgement as to whether the recommendation is worth the price they will need to pay.
Ongoing support
The third step is ensuring that staff can implement their retirement strategy in a cost-effective way. It can be difficult and potentially costly for a pension scheme member to suddenly switch from the institutional setting of their workplace pension to the retail world of broad fund choices and higher fees. However, there is nothing to stop employers from negotiating institutional rates and carrying out due diligence on retirement service providers on their employees’ behalf. It’s a win-win situation – the employee gets access to better rates negotiated by the employer and/or trustee, but the individual pays so there is no cost to the company.
Finally, a fourth step is involving a retirement service provider who will look after an employee not only at the point of retirement but throughout their retirement. Only around 20% of individuals buy a lifetime annuity at present. Almost all others will need ongoing guidance and advice. As retirees get older and need more support to make decisions this is a crucial part of service provision.
But none of the above can be achieved by leaving employees to find passive information on your company intranet. Supporting employees early and helping them to follow a four-step approach to financial education, guidance and advice, retirement income implementation and ongoing support will mean that they get the most of the money they’ve saved throughout their working lives.