How to better educate employees about their pensions
Freedom and choice in pensions, giving employees the power to decide how to manage their retirement income, has certainly made an impact over recent years. However, these freedoms come with much higher risk for employees, and organisations are justifiably concerned.
Employee Benefits’ pension research from 2019 identified the top five retirement concerns employers have for their employees:
- Uncertainty about how to make the best decisions when accessing their pension benefits (74%).
- Lack of a financial plan (59%).
- Running out of money in retirement (58%).
- Financial security in retirement (54%).
- A lack of understanding around the tax implications of accessing a pension (43%).
It’s positive to see that the same research also found that the majority of employers (68%) want to support their employees in making informed decisions at-retirement, and that 60% see it as part of their duty of care.
The key areas of pensions education
A good place to start is to educate employees on how to put a retirement plan together. This should consider 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. Employees should then be able work out whether they have sufficient savings to meet their needs by looking at all their assets including all pensions, ISAs, shares and general savings, and what they are all worth.
Employers should also be helping their employees with defined contribution (DC) pensions to help them understand their retirement income options, what each option means and which approach best suits their needs. Employees will then be able to make informed decisions when they 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.
Educating employees on the latest tax rules will also help when they come to access their pension. For example, do employees realise that typically, only the first 25% of a DC pension is tax-free (calculations for 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’re not aware of the latest tax information.
Lastly, employers should be educating their employees on how to protect themselves from pension 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 Financial Conduct Authority (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 important that they understand the risk of scams and how to protect themselves. They can do this by checking whether any company that they’re planning to use is registered with the FCA (www.register.fca.org.uk) and they can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams (www.fca.org.uk/scamsmart).
Providing the right support
The bottom line is pensions and retirement savings do not have to be complicated, as long as the right support is available.
Providing access to financial education, guidance and regulated financial advice can help employees throughout their career, and especially at-retirement. It can also encourage them to look more holistically at all their finances, not just their pensions, to ensure that informed choices are being made across the board that will help establish a more stable future.
This article is provided by WEALTH at Work.
Supplied by REBA Associate Member, WEALTH at work
WEALTH at work is a leading financial wellbeing and retirement specialist - helping those in the workplace to improve their financial future.
