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12 Oct 2020

The impact of coronavirus on employees’ retirement plans and how employers can help

As the furlough scheme comes to an end, and Chancellor Rishi Sunak extends job support measures to tackle increasing numbers of redundancies, early indicators suggest that Britain’s economic recovery from the coronavirus pandemic is faltering.

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This news, and the ongoing fears around how long a second wave might last, has exacerbated the pressures and challenges already facing UK employees’ pensions, particularly those of older workers.  They may have seen the value of their retirement savings fall following big stock market falls earlier this year.  

No one can completely predict or prevent bolt-from-the-blue events like a pandemic, but they can control how they react to them. When something bad and unexpected happens in the world, it’s vital employees don’t make the effect on their finances worse by making costly mistakes, particularly with decisions that can affect their whole retirement. Supporting sensible choices is where employers can make a huge difference for the better.   

Below we highlight three costly retirement mistakes that could seriously impact your employees’ lifestyles in the future.  

Mistake #1: Making rash or hasty decisions when choosing a retirement option

Some decisions at retirement, like whether to buy an annuity, can’t be changed later on. Employees need to be sure a course of action is right for them before proceeding. We strongly advise against making these decisions quickly in the heat of the moment.

As an employer, it’s really important to remember retirement is a personal decision, but you can help by informing your employees in how to choose the right retirement option. Remind them that they now have a great deal of choice over how they can take an income from their pension, and explain these options in detail so that they can choose the right one. With so much freedom and flexibility, it’s not always easy to know where to begin, but giving employees even useful information is a good start.

For example, if an employee has decided they want to take their retirement income via an annuity, they can often get the best deal by shopping around. You should remind your employees there’s no obligation to buy their annuity from the same firm which provides their pension.

There are a number of different annuity providers in the open market and each will offer different annuity rates. This means that your employees will get more or less income depending on which provider they choose.

As well as shopping around, remind them to add their full health and lifestyle details when they get a quote. Providing details like your height, weight or how much you drink or smoke, can actually mean they qualify for a higher income.

Getting quotes regularly in the run up to retirement can be a really good idea to make sure your employees are aware of what’s on offer for them and help their planning. It also means they won’t miss out if annuity rates go up close to when they want to buy.

Mistake #2: Not getting guidance or advice

COVID-19 has highlighted the need for financial guidance more than ever before. In the world of financial services, the words ‘guidance’ and ‘advice’ take on very distinct meanings. It’s important not to confuse them.

Guidance is useful, general information but doesn’t recommend any products or tell an individual what to do with their money. Most of the time, it’s free. Pension Wise is a great, free resource from the government to help find out about defined contribution pension retirement options if you’re aged 50 or over.

Compared to financial guidance, financial advice is more in-depth. It’s an analysis by a regulated and qualified adviser giving a detailed recommendation based on an individual’s personal circumstances.

Retirement is a time when advice could be worth paying for, as there is so much at stake if your employees make the wrong decision. Having an expert provide them with a plan can give them the peace of mind that their decisions are appropriate and will hopefully benefit them in the long term.

Mistake #3: Forgetting about inflation

The prices of goods and services generally rise over time – known as inflation. You only need to ask an older relative how much a can of baked beans used to cost to see what a difference inflation makes over time. If your employees’ retirement income doesn’t increase at a similar rate, then they’ll lose out in real terms, particularly over the longer term.

But it can be easy to forget about inflation when your employees are planning for retirement. How can they shelter their retirement pot against inflation? This will really depend on the type of pension pot they have, and there are a couple of different options to safeguard against inflation.

If they have a personal pension, they might decide to swap some of their pension for an annuity as some types enable them to inflation-proof their annuity income. There are two ways to do this. They can choose their income to increase each year, as they will normally have the option to increase it by either 3% or 5%. It will mean they will start with a lower income, but will be better protected against inflation. The other option is to link their income to the Retail Prices Index (RPI) so their income will retain its buying power by tracking inflation.

Ultimately, COVID-19 may very well postpone people’s retirement plans. But it’s not all doom and gloom. This delay may give some employees more time and potential to build up a larger pension pot by being invested for longer so they can enjoy more in retirement later on. Even though employees might be working for longer, the pandemic may have given them more time to assess their options, and make the most appropriate decision for their financial circumstances in due course.

This article is provided by Hargreaves Lansdown.  

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