The UK population is facing a retirement crisis, brought on by not enough people saving adequately for their old age and the decline of employer-backed final salary schemes. Over the next few years, as the baby-boomer generation approaches the traditional retirement age, the number of people who have only ever known defined contribution schemes looking to retire will increase and many hoping for a comfortable retirement will be in for a shock.
This situation is being compounded, however, by a lack of understanding about the options available to people as they approach retirement age.
“More than 400,000 people will buy an annuity when they retire and these can be a good or bad deal,” says Jonathan Watts-Lay, director of financial education provider WEALTH at work. “For some people they can be a bad deal because the rates they pay at the moment are low and once you’ve bought one that’s it, you can’t change your mind. Many people are also still taking the annuity from whoever their pension provider is, and don’t understand that they can now shop around and get a much better deal, especially if they have health issues.”
Instead of blindly buying annuities from whoever happens to be their pension provider, individuals need to develop their own personalised retirement strategy. “People need to make a series of decisions over a period of time,” says Mr Watts-Lay. “They might have other investments and savings, which could be turned into an income, and they could think about phasing their retirement and delaying taking an annuity. These are the areas where an adviser can really help.”
Employers should show staff how to optimise income from their pension pots
This is an issue that also affects employers. For many years trustees have looked to invest in the right funds and reduce charges on what is undoubtedly the biggest non-salary benefit they provide, only to then abandon people when it comes to getting the best value for money on retirement. The Pensions Regulator is increasing the pressure on businesses to help employees with this process, urging them to provide education and advice about options at retirement well ahead of their retirement dates so people can prepare for it.
There is a further reason why this matters to employers and employees alike. With the abolition of the default retirement age, it can be difficult for employees to decide when to retire. “If employers help to show people how to optimise income from their pension pots, employees can make a more confident decision about when to retire,” says Mr Watts-Lay. “That’s a benefit to both employer and employee.”
Employers need to focus on educating staff about their options and then encourage them to take regulated advice. “We’re going against the grain on that because there has been an explosion of annuity brokers, who might have slick processes, but don’t assess your full retirement options and can’t give advice even if some form of annuity is right,” he says. “It is probably the single biggest financial decision that most people will make because it can be irreversible, so if there was ever a time to take advice, this is it.”
WEALTH at work is a leading provider of financial education and employee wealth management services in the workplace.
For more information visit www.wealthatwork.co.uk or call 0800 234 6880