Need to know:
- The pension freedoms have left many employees aged over 55 bewildered and unprepared.
- Employers can get their pension providers to do nudge campaigns and offer webinars.
- They should point all over 50s to the free government guidance service Pension Wise.
When it comes to workplace pensions, many employees are floundering, particularly the over 55s who face a bewildering array of options under the pension freedoms introduced in 2015. Indeed one-in-four people aged 55-64 are not even aware of the choices on offer, according to research conducted by Fidelity in October 2020. Furthermore, too many retirees are left to their own devices, sleep walking into bad decisions and huge, unforeseen but avoidable tax bills.
Nigel Peaple, director policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), says: “Pension freedoms revolutionised the way in which people can access their pension savings but currently they are not 100% fit for purpose.”
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Matt Calveley, director at Isio agrees there is room for improvement but welcomes the recent introduction of investment pathways and stronger nudges towards taking guidance at retirement.
Yet Peaple fears the freedoms leave retirees at risk of falling victim to making decisions that end up hurting their retirement living standard. “Not knowing how much money should they draw down, how much of a lump sum they should take or even how long they will live after retiring makes planning for the future difficult without suitable financial advice,” he says.
Yet, staggeringly, Financial Conduct Authority (FCA) data, published in September 2020, revealed that 64% of defined contribution (DC) pension pots accessed in 2019/20 were unadvised, which Hymans Robertson estimates represents £13 billion of assets.
Indeed, in a recent Hymans Robertson survey of over 55s, conducted in December 2020, nearly a fifth of respondents wrongly believe that they don’t have to pay any tax on the income from their pension.
“Pension freedoms need to be exercised within an overarching strategy which takes account of life expectancy, dependents’ needs, taxation, investment risk and returns and includes other sources of income and capital in the plan,” advises Kay Ingram, public policy director at LEBC Group. She warns that retirees without access to advice may fail to withdraw funds at a suitable pace which would ensure sustainability of the income they need throughout life. “This could mean drawing too much in one go and paying unnecessary extra tax on it. If more than the tax-free cash is withdrawn they may fall foul of the money purchase annual allowance, (MPAA), restricting future tax-efficient funding to £4,000 per year,” she adds.
Targeted communication campaigns
Yet there is more help available for both employers and their staff than people realise. “Sometimes a little can go a long way; the pension providers offer a suite of free ‘nudge’ style communications, [employers can ask their] provider to kick start a campaign for [their] employees,” notes Kathryn Fleming, partner, Hymans Robertson.
But Ingram warns employers not to do their own campaigns as they usually “lack the in-depth knowledge required and could unwittingly mislead employees but also they risk straying into the realms of giving advice which could give rise to regulatory issues and liabilities being incurred”.
Raising awareness of the free government advice service, Pension Wise, could be the single most important thing that an employer could do to support their employees, says Fleming.
The biggest retirement risk of all is not saving enough. With this in mind, Fleming advises: “Showing employees how to contextualise retirement, for example, signposting the PLSA Retirement Living Standards, could make a huge motivational difference.”
She adds: “Most mainstream pension providers offer retirement seminars; if employers were signposting and allowing time for employees to attend these, that could go some way to reducing this knowledge gap.”