Employees who are approaching retirement and have a defined contribution (DC) pension now have a lot of decisions to make thanks to the pension changes.
They have to decide whether they want an annuity, drawdown, to take a cash withdrawal or a combination of options; when they want to take their pension; if it is better to use savings first before drawing their pension; and the list goes on and on. WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice has created a list of top ten tips for retirement planning.
WEALTH at work’s top 10 tips for retirement planning
- Encourage employees to make a basic retirement plan – They should think about what they will be doing, how much they think that might cost and when those costs might be incurred. They may want to build in some flexibility as it is almost certain that their plans and needs will change during their retirement. There is a budget planner available on the money advice service website that your employees may find useful.
- Your employees should collate information on ALL of their assets – Before employees start to make any decisions based on their retirement plan, they may want to consider gathering up to date information on all of their pensions and savings. They should also find out how much they can expect from their company pensions and when they will pay out, and the value of other savings and what they are, ISAs or shares for example. The pension income and their savings are what they are going to use to replace their monthly pay.
- Encourage employees to get a State Pension statement – The State Pension rules will change on 6 April 2016, meaning that the full new State Pension will be £155.65 per week and will depend on having 35 qualifying years of National Insurance contributions. There will be a deduction for those who were contracted out of the Additional State Pension. In reality, many people will not be eligible for the maximum amount of the new State Pension. Therefore, it is important that your employees check their State Pension record and National Insurance contribution history early; if they have any gaps they may still be able to make up the difference. They can request a State Pension statement using a form called a BR19, which is available online or by calling the government helpline on 0345 3000 168.
- Your employees should find out what their options are – Pension Wise is a good place to start. The service provides free and impartial guidance on DC pensions, for those age 50 and above. Although it can’t provide advice, it can certainly provide a good insight into their options, and the advantages and disadvantages of these.
- Employees should find out what their pension scheme allows – Does it offer the full range of pension freedoms including, annuity, drawdown, a cash withdrawal, or indeed a combination of options over time? If, as an employer you aren’t able to offer what your employees want they may need to transfer out of the scheme to a provider who can facilitate this. But, they will have to ask themselves if they are confident enough to go it alone, or if they would be better off contacting a Financial Adviser to discuss their options.
- Your employees will need to find out how long it will take to get access to their pension – Employees will need to understand that pension schemes don’t operate like bank accounts, there’s no instant access and it can take weeks to get payments through. Therefore, they will need to know exactly how long it will take so that they can plan for this.
- Employees should work out which options might be right for them and how to put their plan in place – The guidance from Pension Wise might be enough, but if they have more than just a small pension, perhaps some ISAs, other pensions, property, or if their partner has other assets, they might want to consider getting financial advice. A financial Adviser should look at all of their assets and work out the most tax efficient way for them to fund their retirement income, and put the plan into place.
- Employees should be clear about all the costs involved – Whichever route your employees take make sure they are clear about all the costs involved. Doing it yourself isn’t free and there will be charges and commissions to pay. Advice can more than pay for itself, especially if it saves them from making a costly mistake.
- Scams don’t look like scams – Scamslook and sound legitimate, which is why people are hoodwinked. They often have very professional looking websites and literature. Whatever your employees are planning to do with their pension money, they should check before they do anything that the company is registered with the Financial Conduct Authority (FCA).
- Lastly, employees should take their time – Retirement is likely to last a long time, so they shouldn’t make snap decisions or rush into anything they’re not sure about.
Jonathan Watts-Lay, director at WEALTH at work, said: “The freedoms people now have with their pensions is a good thing, but it can be incredibly daunting for many. When previously the main option was to purchase an annuity, many people bought them from their pension provider, even though there may have been better rates available elsewhere. Employees need to understand the many retirement income options they now have because of the pension freedoms, and to know that support is available to help them make the most of it.
“There is a risk that without appropriate financial education employees might not understand the implications of a decision made at-retirement or indeed they may end up depleting their pot before retiring, and thus be unable to afford to retire at their preferred date. Financial education and regulated advice is a really important facility to be available to employees, to help them make the right choices.”