WEALTH at work helps employees understand how to maximise the value of their benefits by delivering financial education tailored to the needs of individual companies and employee groups. Jonathan Watts-Lay is a founding Director of WEALTH at work and is a recognised commentator on financial services including pension changes. In this latest interview, Jonathan discusses some of the key issues raised in WEALTH at Work’s recent article arguing that greater consideration is needed for people’s retirement ‘glide path’.
The UK pension system has recently gone through a serious of major changes. What do you think are the most significant and far reaching of these changes?
The most radical pensions overhaul in nearly a century is underway. These changes promised to offer employees in defined contribution schemes (DC) who are aged 55 or over, greater flexibility in accessing their pension savings; whether they are still working full or part time or ready to retire fully.
With the new pension freedoms came new options to consider and important decisions to be made which will have lifelong consequences for pension savers.
You recently put forward the case that some of these changes may create a number of challenges for employers and employees alike. Which challenges in particular do you think could most easily arise?
Whilst the pension changes are a positive way forward for retirees, the increase in flexibility and choice has also brought more challenges than ever before. After all, many employees start working life with only the most basic financial knowledge and therefore are not prepared for the choices they have to make about their retirement income options.
Employees now have to think beyond pensions and consider all savings such as ISAs, share schemes and any deposit accounts, because tax efficient withdrawal of cash from pensions or any other savings to use in retirement should be an important consideration. But without the right financial education, employees could be left incredibly vulnerable to making poor and costly decisions.
I believe employees will require their employer to answer three main questions; ‘what do I need to know?’, ‘what is right for me?’ and ‘how do I implement it?’ These can be answered in turn by financial education, supported by advice and guidance and then ensuring that the employee can implement their chosen option(s).
However, since the pension changes we have found that many providers including employers and their administrators are simply unable to facilitate the freedoms. But I believe that this is no excuse as there are specialist providers out there such as WEALTH at work who can offer employees access to these freedoms via the workplace.
You highlighted that the pensions overhaul may require people to think carefully about their retirement ‘glide path’. What exactly is meant by this term and what are some of the key considerations you would advise people to take on board?
An area which we feel is a cause of concern is that employees need to give greater consideration to their retirement ‘glide path’. By ‘glide path’ we mean a chosen investment route that will take an employee up to the point of retirement and potentially beyond. It is a formula that defines the asset allocation mix of a pension savings fund based on the number of years to the target date, usually the anticipated date of retirement. The glide path typically creates an asset allocation that becomes more conservative or takes less investment risk (i.e. includes more fixed-income assets such as bonds and fewer equities) the closer a fund gets to the targeted retirement date.
However, our experience tells us that employees find selecting funds for their pension confusing at the best of times, and most choose to invest in the default fund provided by their workplace pension. Prior to the pension changes, a ‘life style’ approach was used and the asset mix in the default fund changed as their retirement date approached, for example including more fixed-income assets in their late career. This is because the default option assumed that an employee would buy an annuity in the future. Many companies are realising this will not now be the choice made by many and consequently want employees to look at their glide path at least ten years before their anticipated retirement date because if they want to choose another form of retirement income such as drawdown, they may wish to address their fund selections at this point, in other words pick a more suitable glide path.
You mention that an employee’s glide path should reflect their needs in conjunction with different means of pensions management. Could you explain how these different means of pension management could intertwine with how people should be managing their glide path?
The pension changes have made more retirement income options accessible to all pension savers, for example taking a whole pension fund as cash or buying an annuity, going into drawdown or a combination of some or all of these. If employees have selected a default fund which is geared towards an annuity purchase at retirement and they are now considering drawdown, they should consider other fund choices; for example; exposing them more to equities and less to fixed-income assets. And of course, if this is the case, employees will need financial education in order to understand this and to help them have confidence about what they should do next to make their selections.
Do you think these issues have been further affected by any of the major outlined policies from the recent government budget?
The government has issued a Green Paper titled, ‘strengthening the incentive to save: a consultation on pension tax relief’ for consultation. It has raised 8 questions and has asked for feedback from the industry on potential radical changes which include no tax relief on pension contributions, a flat contribution from the government and benefits to be tax free on exit.
What do you predict could be some of the major future changes to the pension system?
The green paper looking at the possibility of scrapping the tax relief on pensions is fascinating as it seems to me to be aligning pension savings with the new ‘Help to Buy ISA’. The truth is that we are not saving enough, so anything that can be done to make pensions simpler and more accessible has to be a good thing. There is a risk that removing the upfront tax relief may reduce the incentive to save but on the other hand, the fund could be accessed completely free of tax.
If someone wants to find out more about any of the recent changes to the pension system and how it affects them, what resources are available to them?
The government’s guidance service, Pension Wise offers free and impartial information and guidance to people age 50 and over with a defined contribution (DC) pension. Although it’s great news that individuals will be able to access pension information and guidance through this service, it can’t tell you what is right for you and if you go ahead with your retirement plans without receiving regulated advice, then you won’t get the same level of consumer protection.
I believe employers should offer financial education in the workplace. Once employees have had this and are at the point of retirement, they will want to know ‘what they need to do next’ and ‘how do they do it?’ This is where regulated advice can help employees make the right choices at retirement and prevent costly mistakes from being made.
Alongside pensions, what other aspects of the human resource domain do you think have recently seen significant change?
Many employees struggle to understand various financial issues that may relate to them and often fail to understand the many benefits on offer in the workplace. Employers are recognising that they can help to improve employees’ financial wellbeing by providing them with the knowledge to help them make informed decisions via financial wellbeing programmes.
I believe that the delivery of education is the most important element of any financial wellbeing initiative, which should be aligned with the company’s total reward package, using this to improve employee financial capability and encourage savings.
For more information WEALTH at Work visit www.wealthatwork.co.uk