Best practice: strategies for supporting over-55s with pension decisions

For many people, retirement will involve some of the biggest financial decisions they’ve ever had to make. There are a limited number of times in life when you accumulate a large sum of money and then make one huge decision as to what happens to it next; apart from buying a house, retirement is one of those key moments in life. Having access to the right guidance and, where appropriate, advice is key to ensuring your members are able to achieve a good outcome from your workplace pension scheme.

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Lorica’s workplace pensions & wellbeing research (2018) shows that only 22 per cent of employers offer pre-retirement guidance or courses for employees, and 45 per cent of employers don’t offer any specific help for employees aged 55+ navigating their options under the pension freedoms. This means that not only are significant numbers of employers not gaining maximum value out of one of their most expensive employee benefits, but they’re not helping staff work through some relatively new and complex pension rules that can have their pitfalls.

However, I’m pleased to say that 56 per cent of employers plan to do more to help employees with their retirement choices. Hopefully this article should explain why it’s important to be part of the group of employers that do help in pre-retirement, and how you can best do that.

How have retirement decision patterns changed in recent times?

The pattern of what type of retirement decisions people take has changed dramatically in the past four years. In April 2015, the pensions freedoms enabled some to make an all-out ‘dash for cash’, but for others it has made retirement a more flexible and adaptable process with products that are more suited to their needs.

Prior to the introduction of the pension freedoms, the majority of people retiring from a defined contribution (DC) pension scheme would take their maximum tax-free cash lump sum and use their remaining fund to buy an annuity. Even then, the options available were far from simple. Without specialist support, many people ended up with poor-value annuities and/or overlooked important considerations such as dependants’ benefits or medical factors.

Today, pensions offer much more flexibility. You can still take 25 per cent of your fund tax-free, and you can still buy an annuity to provide you with a guaranteed income for life. Alternatively, you can take all of your fund as a cash lump sum (75 per cent of which is taxed as income). Or you can use ‘flexi-access drawdown’ and take income directly from your pension.

Typical retirement decision-making has been turned on its head, the number of people buying annuities is plummeting and the number choosing ‘flexi-access drawdown’ is soaring.

What company strategies already need to be in place to support staff over-55?

I’ll be brief here, as it’s not really the point of this article, but this is extremely important. It’s all very well saying ‘what happens when they get to 55?’, but if your scheme is not set up correctly in the first place, the employees that reach 55 could already be in a poor place as a result of poor governance.

With the rise in ‘flex-access drawdown’, the ‘lifestyling glidepath’ you have in place is fundamental in making sure an individual’s retirement pot has not been depleted before they get to retirement (as it would if traditional lifestyling is still in place). My colleague Noel O’Hora explains this issue in greater detail in his article: How to ensure your employees don’t have a pensions lifestyle problem.

What strategies can you employ to help your staff who are over-55 in their pension decisions?

A financial education programme, staggered over time, is critical for employees to plan their retirement adequately. They may be on-course to target the retirement they desire, but they may need guidance to help steer them in the right direction in their last precious 10 years or so.

The type of support needed will, of course, vary from member to member. Everyone can benefit from clear, helpful information and guidance. Some people just need to know there is someone they can call to talk through any questions they have. Others need full, personal financial advice. The best retirement wellbeing programme might include financial education in the build-up to finishing working, with financial advice available at the point of retirement when the biggest financial decisions are made.

How can you deliver this?

In terms of financial education in the build-up to retirement, we find the following formats work well:

pre-retirement workshops – typically also attended by spouses and partners, covering both financial and lifestyle considerations
informal ‘lunch and learn’ sessions – outlining the options available and factors to consider, and answering any questions from members
clear and engaging communications – such as guides, videos, posters, factsheets, articles and other content for you to distribute or host on your intranet or benefits portal.

At the point of retirement, there’s two directions you can go in, depending on your budget:

individual guidance-only meetings, either face-to-face or over the telephone, where members can ask questions in confidence
full individual financial advice, based on each member’s personal circumstances.

What pitfalls do your over-55s need to be aware of in relation to pension freedoms?

The Financial Conduct Authority’s Retirement Outcomes Report (2018) revealed the following statistics, which highlight some key pitfalls:

33 per cent of consumers in non-advised ‘flexi-access drawdown’ were holding their money entirely in cash
Between 56 per cent and 76 per cent (the percentage varies according to pension value) of consumers who went into ‘flexi-access drawdown’ did so simply because they wanted to access some tax-free cash
33 per cent of consumers in ‘flexi-access drawdown’ didn’t know where their money was invested.

Evidently, a sizeable proportion of people don’t regard ‘flexi-access drawdown’ as a product designed to generate income throughout their retirement. It can simply be seen as a side-effect of taking some tax-free cash, or it is not really thought about at all. Non-advised drawdown can be problematic, and this is why your employees need your help.

Key factors in retirement decisions

What springs to mind when we think about the key factors involved in retirement decisions of the over-55s? The immediate thought is, have they got 30 or more years of appropriate contributions to their pension under their belt? Not really under your control I appreciate, you can only take a horse to the water while they’re employed with you! However, that will serve them best of all, and then there are a number of key questions to consider:

When do they want to actually stop working?
Do they wish to stop working all together or decrease their working hours gradually?
What does a ‘good retirement income’ look like to them, how much do they think they need to live on?
Do they have any dependents, or a spouse/partner to consider in terms of future income?
When will any spouse/partner be retiring and what does their financial situation look like?
Do they have any other sources of income?
Having decided what income someone needs, is their pension pot big enough to generate that income? Do they need to push back their ideal retirement age and work for longer, or dramatically increase contributions now?
Are they prepared to take any risk in their future retirement income or does it need to be guaranteed for a peaceful life after work?

As you can see, financial retirement decisions are complex and should be part of a process, rather than a one-off question of ‘here’s your pot, what do you want to do with it?’ Ideally, retirement should be a goal that is worked to over 40 years, but the last 10 years can be the most critical.

Any pre-retirement strategies should be part of a full financial wellbeing strategy. It’s only by saving over the longer term that employees will hit their retirement fund targets. Staff must also review their funding and investment strategy regularly over the life of their pension for it to meet its requirements.

Retirement education shouldn’t be a surprise present at the end of your employees’ working careers, because by then it will be too late to re-shape any future they don’t like the look of. By helping your members navigate their options and understand the key factors they need to consider throughout their working career, you help ensure your investment in their workplace pension provides maximum value.

The author is James Biggs, consulting and wellbeing partner, Lorica.

This article was provided by Lorica.