Understanding the options

Jonathan Watts-Lay explains why companies need to be clearer to employees about their retirement options

The changing pension and retirement landscape mean that employees have a number of options to consider. They save for many years into pension plans and other forms of investments to fund their retirement income, but are often left without any guidance at the point of retirement - just 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 the requirement to buy an annuity, together with revised drawdown pension options and the introduction of auto-­enrolment, the provision of financial education and access to specialist advice is more important than ever.

WEALTH at Work recently conducted a survey to determine the approaches and opinions of a range of UK companies in response to these legislative changes and whether or not support is provided to employees. The online research targeted key HR, reward & benefits and pension professionals.

The introduction of auto-enrolment will no doubt be viewed as unwanted government ­legislation by many companies and their ­employees, particularly in the ­current economic climate. ­According to the survey, 52% of respondents predicted that auto enrolment will be greeted both positively and negatively by employees.

However, employees need to ­understand the importance of ­saving for retirement. Effective communication and financial ­education will be required so that employees do not view auto-enrolment contributions as a pay cut.

Retirement income options

Only 23% of respondents believe employees are aware of the various income options available to them at retirement. In many cases, the shift from defined benefit to defined ­contribution pension provision has not been accompanied by an ­increase in employee support, ­leaving employees with little explanation of the income options available to them including annuities.

The removal of the requirement to buy an annuity was not a change that many employees were aware of, with 51% stating that employees will not be aware, while only 13% believe employees will possess knowledge of the change.

It is a belief that there is poor awareness in relation to annuities - alarming given that once taken, it is an irreversible decision.

The expectation among the majority of respondents (67%) is that the removal of the default retirement age will see a significant number of employees choose to work longer. A more flexible ­approach to retirement is likely, with many individuals taking part of their pension benefits and continuing in part-time employment.

Others will carry on working, in order to enhance their retirement savings. This is an inevitable outcome, given that the evidence suggests many employees are not saving enough for their retirement. Indeed, our research shows only 21% believe their employees are saving enough for retirement.

At the point of retirement, an individual must understand which income options are best for their specific situation. In addition, new regulation dictates that a person will no longer need to convert a pension into retirement income by a certain date.

Therefore, an individual must choose the most appropriate income option such as an annuity, pension drawdown or a combination of both. They need to understand the advantages and disadvantages of all retirement income options to be able to make an informed ­decision. A poor decision could adversely affect their retirement income for 25 years or more.

Supporting employees

Two-thirds of respondents (60%) believe there will be an increased requirement for specialist advice at retirement. This support will be essential if employees are to make appropriate choices, given the ­irreversible decisions of annuities and the complexity and risk associated with drawdown pensions.

In addition, 85% believe that some sort of employer-sponsored support will be provided ranging from financial education and advice to written communications.

Reference was made to the increasing need to provide ­support to individuals, with specific ­recommendation that specialist ­advice should be sought before entering drawdown due to the potential risks of this option.

The key issue with this is that employees need to rethink their retirement plans now - whether 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.

Jonathan Watts-Lay is director at Wealth at Work