Jonathan Watts-Lay: Employees need pensions education

Good financial education is vital to ensure staff maximise their retirement income

Pension regulations seem to change constantly, whether it is the removal of the default retirement age or options available for generating income at retirement. As more employees retire from defined contribution (DC) pension schemes, or perhaps a combination of many different pension types, it is more important than ever to ensure they receive the right guidance.

Financial education should be the first step in that process.

Employees save for many years to fund their retirement income, but are often left with no guidance at the point of retirement. This is especially worrying because the choice an employee makes at retirement is probably one of the biggest financial decisions they will ever make in their life.

In fact, poor financial choices made at retirement can often affect an employee’s income level throughout their retirement.

According to the Association of British Insurers, one-third of people do not shop around for an annuity when they reach retirement and, as a result, may be missing out on a higher income, potentially losing thousands of pounds over the course of their retirement. Of course, annuities are not the only option, so a full understanding of all the income options available is needed.

Wealth at Work’s Rethink retirement survey of some of the UK’s largest employers, published in December 2012, found that employers believe only 18% of staff are aware of the various retirement income options available and as few as 13% are aware they no longer have to purchase an annuity.

Scheme combinations

We should also consider the fact that many employees may have a combination of pensions, ranging from defined benefit (DB) to DC schemes, so it is important all their options are understood.

This is critical in ensuring that employees not only understand the detail of their pension scheme, but also how this can be converted into income at the point of retirement. Even for those who have a DB pension, it is important to understand not only how much income the pension will generate, but how this may be supplemented by tax-free cash and other savings.

Understanding how to maximise income in retirement is critical, not least because, after 40 years of saving, employees need to be sure of making the right decision. Financial education provided by specialists which can explain often complex matters in a simple way is an essential tool to achieve this understanding.

Of course, financial education should not be provided in isolation. A combination of financial education and advice is essential to any retirement planning programme, as is the support of online tools and a helpdesk service, which will ensure that employees make the most of their retirement income options.

Having encouraged employees to save into pension schemes for many years, employers are now realising that one of the most important decisions for staff is the one made at retirement to ensure their income is maximised.

Jonathan Watts-Lay is director at Wealth at Work