Legislative changes have increased the retirement income options for staff, says Jonathan Watts-Lay, director at Wealth at Work
The changing pension and retirement landscape means employees now have a number of options to consider. They save for many years into pension plans and other forms of investment to fund their retirement income, but they are often left without any guidance when they need to make what may be the biggest financial decision of their lives.
With legislative changes such as the removal of the default retirement age and greater flexibility in how pension benefits are taken, employees need to rethink their retirement plans.
These changes require new learning and can therefore create uncertainty for many employees. This is encouraging more employers to provide financial education in the workplace to help staff understand the key facts so they may make informed choices about their financial future.
It is also important that, at the point of retirement, individuals understand which income options are best for their specific situation.
New regulations dictate that employees no longer need to convert a pension into retirement income by a certain date. Therefore, individuals must choose the most appropriate income option at retirement, such as an annuity or drawdown.
They need to understand the advantages and disadvantages of all retirement income options to be able to make an informed decision because a poor choice could adversely affect their retirement income for 25 years or more.
Another common concern is that many employees are not utilising their workplace savings fully and maximising the opportunity to increase their retirement income.
Employees need to understand the wealth creation opportunities available to them by virtue of their employment and how these may be combined to provide significant benefits. For example, many employees now have access to a variety of workplace savings plans, such as a workplace individual savings account (Isa), share schemes and pensions, including a workplace self-invested personal pension (Sipp).
Such variety allows employees to choose a savings vehicle or combination of vehicles that are the most appropriate for them at a given point in time to satisfy their personal short-, medium- or long-term savings goals. So, employees who want to build up their retirement pot may benefit from linking share schemes with a workplace Sipp. An employee participating in a share incentive plan (Sip) can transfer shares in specie to benefit from two helpings of tax relief – firstly on the acquisition of the shares, and secondly on the transfer of the shares to the workplace Sipp.
However, without the appropriate financial education, employees may not understand how to maximise savings or mitigate tax. As a result, their long-term retirement savings may suffer.
The key issue with all of this is that employees need to rethink their retirement plans now – whether they are saving towards retirement or taking an income to live in retirement.
It is essential that employees receive financial education and suitable guidance in the workplace to understand their choices, what can be achieved and consequently make informed decisions.
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