5 ways employers can help employees’ money go further – and limit the impact of rising costs on retirement plans
A survey in March 2022 by insight consultancy Britain Thinks found that the rising cost of living is now the primary concern for UK households. It’s overtaken worries about Brexit, climate change and even Covid-19.
Financial wellbeing is an integral part of overall mental wellbeing. Employers could risk having unengaged or distracted workforces if they can’t help to alleviate their employees’ concerns about the rising cost of day-to-day life.
But what can employers do to help?
1. Review your flexible benefits scheme to see if you can further support employees through the types of benefits you offer.
2. Re-communicate existing benefits to your employees, especially those that help stretch salaries further such as lifestyle benefits.
3. If your pension provider offers the service, ask them to run education workshops to help employees invest in their future financial wellbeing through their pension.
4. Consider offering travel loans for those who need to buy an annual or monthly ticket.
5. Encourage consultations with free services such as Money Helper.
Stretched budgets and a shrinking disposable income puts even the best-laid plans to the test. But it’s important to continue planning for the future too.
And pension contributions are vital.
Paying into a pension is a tax-efficient way to save, and over time the compounding effects of contributions can significantly boost retirement income. Employees can, and perhaps should, take advantage of any generous employer contribution structures too.
It may be tempting for employees to reduce pension contributions to help with short-term costs, but this could have a negative impact in the future.
There’s also a possibility that people may still be paying rent or mortgages into retirement. And as we live longer, these employees should be thinking about how they’ll cover these essential outgoings.
What are the options at retirement?
An annuity is a retirement product that allows you to swap some, or all, of your pension savings for a guaranteed income for life – just like a monthly salary. This means it could be a good option for those looking for a secure income to cover daily living costs and essential expenditure in retirement.
After falling out of fashion, annuities are increasingly worth consideration with rates on the rise. And we could see further uplifts in annuity rates in the coming months.
In May 2022, a £100,000 pension could get you a single life level annuity income of £5,845 per year (based on a person with no assumed health conditions, age 65, with a single life, level, five year guarantee annuity and paid monthly in advance). This is a huge improvement on recent years, though still some way off the levels before the global financial crisis.
Shop around for annuities
Features such as inflation proofing or continuing income for your partner after your death can be incorporated into an annuity too. It's important to shop around and get several quotes, as providers will offer different rates at different times and an annuity can’t usually be changed once set up. It’s also vital to confirm health and lifestyle details, as these can boost income further.
Drawdown is another way of taking money from your pension. You can withdraw up to 25% of the value of your pension as a tax-free lump sum. Any remaining funds can stay invested, and you can take flexible income payments as and when needed.
It’s a higher-risk option because the money typically remains invested, so won’t be for everyone. If investments go up and you don’t take too much out, you have the potential for your money to grow. But the risk is you could run out of money if your investments go down, you take out too much too early, or you live longer than expected.
Tax free lump sums
Another option to consider is taking lump sums ( know as Uncrystallised Funds Pension Lump Sums - UFPLS). It’s a flexible way to take money from your pension as you can withdraw your entire pension in one go, or a bit at a time. Usually 25% of each withdrawal will be tax free and the rest taxed as income. Anything you don’t withdraw stays invested as you choose.
But, like drawdown, the same risks apply. There’s a risk of withdrawing too much too soon and you need to be aware of the risk for anything still invested and review your choices regularly. Tax rules can change and benefits depend on personal circumstances.
An holisitic approach to retirement is key
Katie Hooper, head of workplace retirement at Hargreaves Lansdown, says a holistic approach to retirement planning is key.
“Employees don’t need to take money from their whole pension at once. A mix and match approach is worth considering - a secure income though an annuity using part of their pension pot to cover essential outgoings and keeping the rest of the pot invested for flexible withdrawals through drawdown or lump sums as and when they need this.
A phased approach is also an option to think about - going into drawdown when they retire to access their tax-free cash, then securing an annuity income later in life, when health may have declined and they may qualify for an enhanced rate. At this life stage, they may also prefer to secure a guaranteed income rather than the risks associated with managing drawdown or UFPLS.”
The government provides a free and impartial service to help those over 50 understand their retirement options. Pension Wise is available online or by calling 0800 100 166.
Supplied by REBA Associate Member, Hargreaves Lansdown
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