By Dale Critchley, Workplace Policy Manager, Aviva
Those of us who have ever bought a lottery ticket have probably planned out what to do with the winnings. That might include buying a home for family members, donating to a favourite charity, or buying luxury items like supercars or yachts. With that amount of money, it is understandable that people might also give up work. There is clearly a temptation to blow a big chunk of the cash in a short amount of time. A more sensible approach might be to invest a chunk of the money to ensure an income for life.
We can all dream, but for most of us the biggest pot of money we will need to deal with in our lifetime will be our pension pot. For many, it is likely to be small beer relative to a lottery win but the decisions we make about how to spend a pension pot are of no less consequence and no less life changing. With that in mind it should not be a surprise that the Department for Work and Pensions (DWP) has issued a call for evidence about what schemes can do to help people make better decisions about converting their pension pot into an income for life.
Some of the ideas are taken from the Financial Conduct Authority’s (FCA) Retirement Outcome Review findings. There cannot be many arguments against earlier engagement through concise wake-up-packs at age 50. At Aviva, we also engage our over 40’s through our mid-life MOT, when people have a longer period to make positive changes to their retirement outcome.
Investment pathways mean that people are less likely to be invested in an inappropriate option but are not necessarily a silver bullet, rather a step in the right direction.
New proposals include the possibility of adopting a Collective Defined Contribution (CDC) approach to providing income. This brings us back to similar decision-making territory as that facing a lottery winner - and anyone else looking to exchange a lump sum for a more certain income for life. It comes with its pros and cons so it will be interesting to see its evolution.
The big difference between a lottery winner trying to make their pot last a lifetime and a pension scheme member facing the same dilemma is that the lottery winner is likely to have a financial adviser to help them make decisions. Converting a pension pot into an income in retirement needs an understanding of all the options, for example, the tax implications, likely investment returns, and longevity. The risk is making a bad decision.
We recommend that people take guidance from Pension Wise. However, while satisfaction levels are high, the take up levels are relatively low. It would help if it were easier for schemes to provide useful guidance without straying into advice.
Advice should also be accessible. Choosing an adviser must feel like choosing a builder or mechanic, but with much more at stake.
Pension scheme trustees and employers should look at the opportunity they have to recommend a trusted adviser to scheme members.
As is often the case for a lottery winner, when it comes to helping pension scheme members spend their life changing amount of money at retirement, it is advice and guidance which has the biggest role to play. Investing in financial advice could be the best investment a person can make.
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