40 pensions & auto-enrolment
Pension reforms – an opportunity being missed?
It is now just over two months since the Government’s reform of UK pension legislation came into effect, and a little less than 18 months since the reforms were first announced by George Osborne in his 2014 Budget. The effect of those changes is that people who are members of defined contribution (DC) schemes now have complete flexibility on how to access their retirement savings, writes Julian Richards, director, Pitmans
At least, that is the idea. What is happening in practice may not, yet, fully reflect the Government’s objectives to allow people complete control over the pension funds they have accumulated.
Prior to what has colloquially become known as “Freedom Day”, members of DC schemes had largely one option when it came to retirement. Namely, they could use the funds that had accumulated in their pension pots to purchase an annuity. While offering the positive benefit of a guarantee of regular income in retirement, that guarantee comes at a price – literally. On exchange for the pension funds members have built up over their working lives the annuity provided will offer an exchange rate – the price – of cash for pension.
One of the drivers for reform leading up to 2014 was the fact that those exchange rates are at an all-time low with seemingly little chance of recovery. Not so long ago in 1990, an annuity could be secured at a rate of around 16% - so for every £100,000 of cash, a retiree would receive £16,000 per annum pension. Today, rates are as low as around 5.5% meaning the same £100,000 will only buy a pension of £5,500 per annum. In addition, if a saver wants to factor in an annual inflation increase then the rate could fall to around 3.5%. Someone looking to retire before age 65 will see a further reduction, and so it goes on.
Given that individual savers have no control over the annuity price they will pay – save for putting off retirement in the hopes that the rate will improve, but very few can afford to play that waiting game – the reforms were an attempt to give people the opportunity to access their savings in other ways. As a result savers can now, in theory at least, either
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withdraw all their savings in one go, take a regular or infrequent drawdown from their savings while leaving the remainder invested or, should it prove the best option for them, still exercise a right to purchase an annuity.
Sadly, despite an initial flurry of media coverage, a startling number of people and employers appear to be unaware of the reforms and consequent new opportunities. Back in July 2014, a survey by Axa Wealth found that almost two-thirds of UK adults were not aware of the changes announced by the chancellor four months previously. Fast forward to May this year and a survey by Towers Watson found that of the 5,000 UK employees asked, 62% were “either totally oblivious of the Government’s recent pension freedom laws or have scant understanding of how they are affected”.
In an attempt to assist DC scheme members understand the opportunities available to them, the Government launched from Freedom Day the Pension Wise service whereby those DC scheme members looking to retire could get free financial guidance on the options available to them. However, in April immediately prior to the launch of the reforms, figures suggested that 56% of small and medium-sized employers – from whom the majority of DC scheme members will be retiring – admit they have never heard of them or the Government’s new Pension Wise guidance service.
Pitmans' own survey of 277 companies in April revealed that less than 45% had engaged with their employees on how they might be affected by the reforms with 20% saying they had never heard of the changes.
Clearly, despite offering significant THE BUSINESS MAGAZINE – THAMES VALLEY – JULY/AUGUST 2015
opportunities for pension savers, this is fast becoming a missed opportunity.
Equally as worrying is the lack of engagement, and missed opportunities for employers looking to effectively manage employee benefits, to care for employees as they approach retirement and to manage successful transition of staff. Increased engagement with staff, and the DC schemes of which they are in membership is crucial if companies are going to ensure that they, and their employees, make the most of what are radical reforms to the way in which people move from earned income to income from savings.
Now is the time for people to make efforts to look at their retirement savings, and for employers to review how and what retirement provision they offer their staff, to ensure that we don’t find ourselves in 10 years time looking back and wondering how such good opportunities were missed.
Details: Julian Richards 020-7634-4649
jrichards@pitmans.com
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