36 pensions
Open those glazed eyes to the retirement revolution
There was a time when you might mention ’pensions’ or ’annuities’ in a conversation and you could watch a person’s eyes glaze over. Those days are fast disappearing, writes John Burbedge
Changes made in recent years – the market move from final salary to defined contribution (DC) pensions, the 2012 introduction of employers’ auto-enrolment of employees in workplace pensions, and this year’s Budget implications for annuities – have refocused personal and corporate attention on retirement finances like never before.
Enlightened employers, particularly large corporates, will already be abreast of their auto- enrolment responsibilities; eager employees will already be considering the fresh opportunities for their pension pots.
Those glazed eyes should now be sparkling with interest, say PwC colleagues Peter Woods and Alan MacCleaster – but for many the age of enlightenment is still to arrive, and yet those Budget pension implications go live in April 2015.
Currently, savers can take 25% of their pension pot tax-free when they retire. This will remain, but tax on withdrawing the rest of the cash will be cut, making it easier for people to use their entire fund as they wish. Experts estimate that next year uptake of annuities (income that’s guaranteed for life) will reduce from around 90% to 25%.
So, grey-pound power is set to increase in the expenditure and investment fields, and the focus of employer involvement in employee retirement could broadly go one of two ways – governance or guidance, says pensions consultant MacCleaster.
Some companies will do the bare minimum while complying with their corporate governance and legal obligations. From April 2015, providers will have to put in place governance committees, responsible for ensuring workplace schemes are run in the best interests of members. Value for money, charges and default investment procedures will need to be clear for employees.
Other employers will be more paternalistic, even innovative in providing greater guidance, flexibility and choice in employment and retirement packages. Such employer assistance, no doubt supported by the professional services sector, might even become an attractive feature for CSR and employee recruitment purposes.
It might even be in employers’ best interests to ensure their employees are saving enough for retirement. Employers can then manage their future workforce requirement better, suggested MacCleaster.
However, there are several reasons why eyes are still glazing over at the mention of retirement planning.
www.businessmag.co.uk Alan MacCleaster
Firstly, people are unsure when they might retire – the norm of 65 is becoming largely irrelevant. People are living and working longer. Most people can expect a 50% longer life after 65 than they could 50 years ago. Health and lifestyle choice now tend to determine when people decide to ’retire’.
Although often viewed as complex and confusing, the traditional pensionable route to annuities has been widely accepted. Only now, with Budget encouragement, are more people actively questioning the cash returns on annuities.
“The revolutionary change is about moving away from the culture of relying on employers to make sure we are looked after in our old age, to one in which we look after ourselves,“ explained MacCleaster.
“From now on, we will all be ’saving for retirement’ but in many different ways,“ said PwC partner Peter Woods. An annuity-ending pension will simply become another funding option.
“As a society, we’ll need to generate a culture whereby we all understand this stuff that most don’t now understand – about pensions, annuities and financial investment decisions,“ stated MacCleaster. “People will get more used to getting financial advice,“ added Woods, “but most will still value certainty of income.“
Workstyles are also changing with many people having far more employments, both full-time and part-time, in their lifetime. They could end up with several workplace pensions alongside their own personal pension provision.
Then comes the question of choice – how to use that pension pot. Demand will drive fresh
THE BUSINESS MAGAZINE – THAMES VALLEY – JULY/AUGUST 2014
Peter Woods
products, said Woods. The financial markets are set to develop innovative investment options, including more attractive annuities, for potential cash-rich retirees.
Finally, there is the oft-delayed risk v reward question that individuals must decide on when approaching retirement. Do I use my pension pot on a shore-to-shore world cruise or a safe-and- sure annuity? Do I enjoy life while fit or provide for my infirm years?
These latter reasons – adding complexity – are why Woods and MacCleaster believe the Government’s “major step forward“ towards simplified self- funded retirement, underpinned by an affordable state pension, could take many years to achieve.
However, the PwC pair feel we are currently entering a new age of awareness about the need for lifetime planning for ’retirement’. The glazed eyes are beginning to open.
Individuals will seek better information about their options through all media channels, and the pensions industry will need to provide and communicate those options clearly and attractively to an increasingly-discerning client.
Either way, since most employees will contact their employer first about their workplace pension, future retirement issues will require decisions from businesses of all sizes. Do they take the compliance route, the paternalistic approach, rationalise multi- tiered DC workplace options, boost employee communication, offer long-term savings schemes, or call in professional advisers?
Details:
Peter Woods 0118-9383533
peter.j.woods@uk.pwc.com
Alan MacCleaster 0118-9383598
alan.maccleaster@
uk.pwc.com
www.pwc.co.uk/southeast
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