Are we in the midst of a pension revolution?
The Government’s recent pension reforms bring about a quiet revolution in how working people save, access, manage, and use their pensions. The new rules state that people can now access their pension pots freely from the age of 55, and take as much as they want – subject to tax.
Much has been made of the increased freedom, choice and flexibility brought about by the reforms. However, people need to be aware of the risks as well.
Employers have an important role to play in educating their staff, and providing guidance and support to help individuals make the right decisions for them. This is as much about avoiding the pitfalls as reaping the benefits of the new rules.
Our latest research shows that many are concerned about the impact of the reforms. They worry that there could be an increase in irresponsible spending and fraud as a result. Many pension experts share these concerns.
So let’s take a closer look at these two issues.
Although drawdown is not necessarily a bad thing, it does come with the risk of irresponsible spending especially if too much is taken out of the pot too quickly.
For instance, if you start drawing an income pot at the age of 60, you could still live for another 30 years or more. Any run down of capital, given your life span is unknown, could see you get into trouble with the real risk of running out of money later in retirement.
When considering how much to draw from your pot, you need to consider two key questions. How long do you think you will live and how much can you afford to take from your pot? There is no right answer to these questions but you must be as realistic as possible. Employers – working with pension experts – can provide guidance to employees to help them make the best decision for them. For most individuals considering drawdown steering them towards regulated financial advice will be an important part of that.
Personally, I believe that most people will want the security of at least some form of guaranteed, regular income to cover living expenses. People need to sleep soundly at night and know they have somewhere to live and can pay essential bills. So for many people, annuities or a mixture of an annuity and drawdown will still be the most attractive, less risky option.
Another concern people have is regarding fraudsters trying to get hold of vulnerable pensioners’ savings. We have all seen stories in the UK press about pensioners being targeted with texts and calls by unscrupulous financial advisers or bogus pension schemes before the new rules came into effect. The worry that people will lose their life savings by transferring their pension into these schemes is therefore entirely justified. The government and industry must closely monitor this sort of activity to stop any wrongdoing.
So what does this mean for employers?
For many people, the pension reforms will provide benefits of greater freedom, choice and flexibility to enjoy a better retirement. However some employees are in danger of miscalculating how much money they can take out of their pot, or worse being the victim of frauds and scams.
‘Drawing down’ too much too early could mean that you run out of savings, and this could be at an age when returning to work may not be a practical option, leaving you with state support as your only income. Employers that fail to provide the necessary support to staff, to ensure they spend their pension responsibly and avoid falling victims of fraud risk damaging their reputation.
Employees are looking to employers to help. Employers should see it as a unique opportunity to enhance their employer brand, educate employees about their options and provide them with the support they need for a secure and happy retirement.