Pensions
Helping employees retiring
JonathanWatts-Lay, director at WEALTH at work, advises
T he turbulent markets we are experiencing at the moment are concerning for everyone, but especially for employees who are in a defined contribution (DC) pension scheme and looking to retire. Whilst retirement planning is important, it is particularly crucial when stock markets are volatile; therefore, employers should ensure their employees understand their options. The following checklist can help here. ● 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. Employees may find they are able to adjust their spending in the short-term to compensate for any pension losses such as not buying the discretionary extras. ● Encourage employees to not cas-out in panic – No one knows what is going to happen in the near future, but what we do know is that if employees cash-out now they will not only be taking money out of their tax efficient pension but they may also lose out when markets recover. ● Ensure employees understand the tax rules – As well as the risk of potentially selling at the bottom of the market, the other danger of cashing-out is that employees risk paying a lot of unnecessary tax. Usually only the first 25% of a DC pension is tax free; the remaining 75% is taxed as earned income. By taking their pension as a cash lump sum, not only will they be selling when markets are low but they may end up with a big tax bill.
● Help employees understand their options to delay retirement or work part-time – There is every chance that everything will look very different in a few months’ time. If employees are able to delay their retirement, it may be worth them considering this. It would give some time for markets to see some recovery and enable more confidence in leaving the workforce. ● Encourage employees to consider other pensions and savings – When it comes to retirement, there are many assets such as cash ISAs (individual savings accounts) and general cash savings, which can be used as potential sources of income in addition to pensions. If employees want to give their pension time to recover, they might want to use these other savings first. For those who may also have a defined benefit pension, the pension income entitlement that has been built up is secure, so stock market fluctuation will not impact the pension income payable at retirement. ● Encourage shopping around – Employees should shop around before they purchase any retirement products. The Financial Conduct Authority (FCA) (https:// bit.ly/3e3kFOb) found that those who go into income drawdown could increase their annual income by 13% by switching to a lower cost provider. It is important they not only check fees but are sure it suits their needs and that they can withdraw cash as and when they want it, and for as long as they need it. ● Promote the importance of regulated financial advice – Speaking to a regulated financial adviser can be reassuring and can cost the same if not less than buying retirement products, such as annuities, through some online brokers. It can also
be seen as an investment as an adviser will look at all the employee’s assets, work out the most tax efficient way to fund their retirement and then put a bespoke plan in place which will support them throughout retirement. ● Help employees protect themselves from scams – In turbulent times like these, when employees are concerned and vulnerable, scammers see opportunity – so it is important for employees to be vigilant. Scammers tend to sound completely legitimate and it’s easy to see why so many people are fooled. It isn’t small amounts of money being taken – findings from the FCA and The Pensions Regulator (https:// bit.ly/3e4MR2Z) show that victims of pension scams could lose 22 years’ worth of savings within 24 hours. So, it’s vital for employees to check whether the company they’re planning to use is registered with the FCA (https://register.fca.org.uk). They can also visit the FCA’s ScamSmart website (www.fca.org.uk/scamsmart) which includes a warning list of companies operating without authorisation or running scams. We have always encouraged employers to provide support to their employees at retirement but it is even more important now under the current circumstances. Providing financial education and guidance is the one thing employers can do to help their employees make informed decisions. Financial education at retirement can be delivered in a number of different ways and although face-to-face seminars remain our most popular and effective communication method, this may not always be possible. Therefore, formats such as live online webinars and individual telephone (or indeed video) guidance calls can be an effective alternative. This range of delivery methods can ensure the majority of members are supported whether they work remotely or not and can also ensure a solution for deferred members. n
...they may also lose out when markets recover
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| Professional in Payroll, Pensions and Reward |
Issue 61 | June 2020
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