How pension schemes and their advisers can help employees make better decisions for later life
The 'stronger nudge’ is the government’s latest initiative to deliver better outcomes at retirement. Before June this year, DC schemes were only required to signpost members to the Pension Wise advice service. Now, when someone applies to access their pension pot, the scheme must offer to book a Pension Wise appointment.
This is a significant step forward and should be welcomed, but is it enough?
Take up of Pension Wise has been low, around 14%. Even if the ‘stronger nudge’ doubles the numbers, most people still won’t use the service. Of course, some of those may have access to regulated financial advice, others may genuinely know what their options are without further support. Others still may be sitting on small pots, incidental to their main pension provision, perhaps from a generous DB scheme.
All of these can be legitimate reasons to opt out, but we know there are a significant number of people who would benefit from receiving advice or guidance that aren’t.
People need advice earlier
Timing may be an issue. The offer to book a Pension Wise appointment is triggered when someone applies to access their pension pot, but is this too late? At this stage, many people will have decided what to do with their pension savings.
Their rational may or may not be sound, but they’re often reluctant to reconsider. The traits that lie behind this could be overconfidence bias, the tendency for some people to overestimate their ability, or confirmation bias, having made a decision people tend to filter any new input to fit their original analysis.
Members are eligible for a Pension Wise appointment from age 50 and so there is scope to deliver the stronger nudge to people at earlier ages. Offering a Pension Wise appointment before a member is eligible to access their pension may be more effective as people may be more open to take on board information and not distracted by a dash for cash.
Pensions can be overwhelming
It’s also important to bear in mind that Pension Wise only offers guidance. This can be helpful, but it still means people have to work out what’s best for them.
Many people find pensions overwhelming: the options, the language, the magnitude of the decisions. Most people only retire once during their lifetime. It’s not like taking out a mortgage, where people move house several times and build up knowledge each time. Retirement happens once. What’s more, it can take many forms, some of which may or may not still include work.
This concept of a transition from work to retirement also undermines the Pension Wise approach of a single meeting. Most people will need help during any transition and beyond. Retirement isn’t a ‘one and done’. The best laid plans can be unsettled by a variety of events: changes in health, mentally and physically, the death of a partner, care needs, investment market downturns and much more.
It's not a single decision
The challenge for most people isn’t simply to make the right decisions at outset, it’s to regularly review those decisions throughout retirement. This is easier if someone chooses to use their savings to buy a guaranteed lifetime income, but most people now choose drawdown.
Despite these reservations, the stronger nudge works for many people. In some cases, it may simply validate their intended course of action. Not by straying into advice, but by reinforcing their understanding of each option. For others, it may provide enough information for them to confidently take the next step and make sound decisions.
At the same time, there will be others who need more direction. Someone to take the lead. Someone who will analyse their financial position and make a personal recommendation. In other words, some people will still need regulated financial advice. Those who can afford financial advice, may already have a financial adviser, but there will be people who need more than guidance, but can’t afford the costs of traditional face-to-face advice.
Pension schemes and their professional advisers can help in several ways. They can bring their resources to bear to secure better deals for members.
Digital and face-to-face advice
They can leverage initiatives like the pensions advice allowance to help members tax-efficiently fund advice from their pension pot. And they can use their experience of the market to identify affordable advice options. For example, hybrid and digital advice.
New digital solutions are coming to market offering fully regulated advice at a significantly lower cost than traditional face-to-face advice. What’s more, some of these are hybrid models which combine digitisation with the opportunity to interact with a person when required.
Several pension schemes already facilitate access to advice for members. For many others this is the missing piece that could provide better retirement outcomes now and in the years to come.
In partnership with HUB Financial Solutions
We are totally focussed on finding the right financial solutions for people approaching, or in, retirement. We don’t do anything else. Our purpose is to help people achieve a better later life.
