What are your employees doing with their pension money?


When pension freedoms were announced it was expected there would be a widespread spending boom by those of eligible age. Updated research from the FCA is shedding light on some interesting trends since freedoms arrived in April 2015.

A survey by the FCA of 56 providers between April – September 2016 showed that accessing pots early has become ‘the new norm: 72% of pots have been accessed by consumers under 65, most of whom have taken lump sums.

Now whilst this is all very well and good, it should be noted that 94% of these people stated they had alternative sources of income, the most common of which was a final salary scheme. However, what is concerning is the precedent that this is setting in the market.

Although the survey doesn’t capture this data it can be reasonably assumed that many of the individuals who are taking cash are doing so simply because it is available and are then going on to continue work.

Over half of people are putting these funds into investments (FCA Retirement Outcomes Review) and herein lies the problem. Pensions remain one of the most tax efficient products in which to let your money grow and so taking it out of this wrapper to simply invest it elsewhere rarely makes much sense.

An underlying mistrust

When we are out speaking to employees as part of our engagement seminars and sessions, there is always an underlying mistrust of pensions. People seem to think that unless they cash in their pension pots then this money will simply be taken back by the Government or disappear in the long run. In essence, employees don’t feel true ownership of their pension until it registers in their current account.

How can employers help?

So what can we do to help employees make smarter decisions around their finances? Well traditionally this has where financial advisers have stepped in. Unfortunately, given the c. 20,000 financial advisers and 8 million newly auto enrolled employees in pensions, the numbers simply don’t stack up.

Employees with smaller pots will not get the help they need. This is backed up in the FCA’s report where it was found that “the proportion of drawdown bought without advice has risen from 5% before the freedoms to 30%“.

In the absence of widespread programs aimed at helping people better manage their finances or improve their financial capability these stats around decreasing levels of advice are concerning.

A recent study by the International Longevity Center found those receiving financial advice who would classify themselves as ‘just getting by’ accumulated, £25,859 (or 21%) more in pension wealth than the ‘just getting by’ who did not receive advice. Given the overall size of the savings in question, to those on a lower income advice can be the difference between enjoying a comfortable retirement and having to work for additional years which they don’t want to.

As an employer we must ask ourselves are we happy to allow people to simply raid their pension as soon as it becomes available? And if so are you happy your employees are in a position to do so without advice?

Those currently cashing in their pension, on the whole, have other sources of income. However, in the future as the number of employees with final salary pensions schemes decrease, we may see employees get to the point of retirement in worse shape than ever.

Phil Blows is director at Wealth Wizards.

This article was provided by Wealth Wizards.


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