Six steps employers can take to help employees who are retiring in 2020
The New Year is the perfect time for employees to take stock of their finances. For those approaching retirement, they will have a number of decisions to make given the freedom and choice in pensions. Many will turn to their workplace for support with this.
Here are six steps employers can take to help employees who are retiring in 2020.
1. Encourage employees to put a retirement plan together
Before making any decisions about retirement, employees should put a plan together which considers how much income they will need in retirement to meet their day-to-day living expenses (household bills etc.), discretionary income (holidays, hobbies etc.) and how their income needs may change over time.
They should also work out whether they have sufficient savings to meet their needs by looking at all their assets including pensions, ISAs, shares and general savings, and what they are all worth. Research has found that most people live longer than expected, so employees should keep this in mind when doing their sums. For example, the Office for National Statistics estimates that life expectancy in the UK for people aged 65 in 2016 to 2018, will be around 18.6 years for men (living to 83.6 years) and 21 years for women (living to 86 years).
2. Help employees understand their retirement income options
Employees who have a defined contribution (DC) pension will need to decide how to access their income; whether that is through income drawdown, buying an annuity or taking it as a cash lump sum or indeed a combination of these options. Yet our 2019 pensions research with Employee Benefits found that, 74% of employers see uncertainty about how to make decisions when accessing pensions as a key concern for employees as they approach retirement. Financial education, guidance and/or regulated financial advice can help employees understand exactly what each option means and which approach best suits their needs.
3. Ensure employees understand the tax rules
Do employees realise that, typically, only the first 25% of a DC pension is tax-free (calculations for defined benefit (DB) schemes will differ) and that the remaining 75% is taxed as earned income? Employees could find themselves paying more tax than they need to if they don’t plan carefully.
For example, we polled more than 70 employers in 2019 and found that 91% of them believe that employees do not understand the tax rules when withdrawing money from their pension. It is really important that employees take the time to understand these rules as it may be possible to save significant amounts in tax.
4. Encourage employees to shop around
Employees should be encouraged to shop around before making any decisions about purchasing any retirement products. Which? found in 2019 that shopping around for an annuity can increase an individual’s retirement income by 20%. However, the Financial Conduct Authority’s (FCA’s) Retirement Income Market Data 2018/19 found that, only 11% of pensions were accessed to purchase an annuity, and an increasing number of people were accessing their pension through income drawdown. It is crucial that employees do as much research as possible to ensure they select a retirement option that best suits their needs. This means finding a solution that enables them to access the right amount of cash as and when they want it, and for as long as they need it.
5. Protect employees from scams
Scammers often use highly professional looking websites and marketing literature to lure individuals in, and they tend to sound completely legitimate. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken. Findings from the FCA and The Pensions Regulator show that victims of pension scams could lose 22 years’ worth of savings within 24 hours. So, whatever employees are planning to do with their retirement savings, it’s really important that they understand the risk of scams and how to protect themselves.
Employees can do this by checking whether any company that they’re planning to use is registered with the FCA and they can also visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation or running scams.
6. Promote the importance of regulated advice
Many people are concerned about the cost of regulated advice without realising that when they buy retirement products such as annuities, through online brokers for example, there are commissions to be paid which can cost just as much, if not more than getting advice.
Employees should understand the importance of seeking regulated advice. After all, the International Longevity Centre’s The Value of Financial Advice (2017) research suggests that ‘affluent’ individuals who received advice accumulated on average £30,882 more in pension wealth than those who didn’t take advice. Regulated advice also provides the benefit of consumer protection for the advice given, as well as a retirement plan tailored to an individual’s needs.
“The New Year is a great time for employees approaching retirement to have a good look at their plans and think about how they can make the most of their savings,” says Jonathan Watts-Lay, Director at WEALTH at work. “But before any decisions are made at-retirement, employees really need to understand what their options are and the generic advantages and disadvantages of these, as well as considering any associated risks such as tax inefficiency, longevity, losing money to scams and, ultimately, running out of income sooner than expected.”
“Many workplaces now offer support to their employees in terms of financial education, guidance and regulated financial advice, so that employees are informed at-retirement and can make better choices which will lead to better outcomes for all,” concludes Watts-Lay.
This article is provided by WEALTH at work.
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