By Martin Palmer, Head of Proposition, Corporate Benefits - Friends Life
There have been a lot of headlines around how the new flexibility around retirement income also brings many new challenges. The challenge is to get employees to start thinking around quite how many new challenges, without encouraging them to turn off, because the burden is seen as too great. Member engagement and communications will become ever more critical, to ensure that the member’s investment strategy is appropriate for how they plan to use their pension pot.
Longer term, we expect to see less cliff-edge retirement, with more employees drawing funds gradually during retirement. Phased retirement could well become a pattern, meaning there will be less distinction between the accumulation and retirement phases of a member’s lifetime within their pension.
Research released by Friends Life* seems to support this view, with only 7 per cent of people saying that they will take 100 per cent of their funds. The average amount people said they would release at retirement was 33 per cent. One in four (25 per cent) would consider taking 50 per cent or more of their pension pot in cash at retirement. A quarter (24 per cent) of people plan to reinvest the money making it critical to access the information and support they need to make informed decisions.
We have heard already how education will be even more important in this new world of retirement, and we will have to work hard on many aspects of the new decisions employees will have to make. Investment strategies are increasing in importance and employees will require flexible and adaptable solutions that can potentially combine accumulation and decumulation.
Pension scheme members are in general averse to taking risks with most of their funds, but are happy to take some risks. In order to make the most out of the accumulation phase for many, educational tools need to become sophisticated enough to make this distinction.
Longevity is another issue employees will need to be educated about. Not something a lot of us like to think about, but in the past this risk was dealt with by the annuity providers and calculated by experts. Pension scheme members now need to make an educated guess on how long they may live to ensure that their plans for their pension pot are adequate for the rest of their lives.
Employees will need to make financial plans and calculate expected retirement spending, potential income and how to cover living costs. Taking tax-free cash is attractive but how much of an actual income is needed for a viable retirement? Simply judging from past experience, however, many people will opt out of some or all of the decision-making altogether.
[1 OnePoll survey commissioned by Friends Life. Sample of 2,000 adults (1071 women and 929 men) in full time employment carried out on 22 April 2014.]
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