What free assistance will your work pension scheme supply at retirement
Turning your pension funds into an income that can replace your salary is among the most important financial moves you will make in your life.
Workplace pension schemes offer a lot of free help that it is worth taking full advantage of as you determine what you will have to live on in old age.
Here, we look at what you can expect from your work scheme as you get closer to retirement, and round up expert advice on how to maximise your future income.
New rules: Some work schemes are likely to partner with outside firms to provide products and services beyond retirement age
The options available are set to expand in future as the Government has announced legislation requiring workplace schemes to offer savers ‘default’ options to turn pots into an income.
Some large workplace schemes have already started looking at making arrangements for people who take their tax-free cash lump sums, but make no active choice on how to access their remaining funds, according to a recent report by pension consultancy Barnett Waddingham.
‘This is an area where we are expecting to see much innovation over the coming years,’ says the firm. ‘The larger schemes continue to lead the way on ensuring support is in place for their members as they start to draw their benefits.’
It notes some work schemes are likely to partner with outside firms to provide products and services beyond retirement age.
More details of the Government’s plans are explained below, plus the pros and cons of work schemes ‘defaulting’ people – who might have an array of other pensions, savings and investments – into pre-made income products.
Jonathan Watts-Lay, director at retirement specialist Wealth at Work, says: ‘It’s important that members understand how their pension schemes work, what they should be contributing, what funds they should be selecting, and ultimately, what size of pot they need or want when they get to the point of retirement.
‘Then, once at retirement, people need to understand the options available to them for creating retirement income from pensions they have accumulated, as well as other savings such as Isas or other investments.
‘Understanding what their state pension will be and when they will receive it is also crucial.’
What is the typical retirement timetable?
Pension schemes usually start ramping up efforts to get people to look at their pots and prepare to make decisions from when they reach the age of 50 onward.
Emma Douglas, director of workplace savings and retirement at Aviva, explains the typical milestones and the useful actions to take at these points.
Five years before retirement
‘Depending on your pension scheme, you might expect to be prompted to consider your pension choices every five years from 50 years old,’ she says.
‘This is a good time to use a retirement calculator to check your likely income in retirement and check how it stacks up against the PLSA Retirement Living Standards. See the box on the right.
‘It’s also a good time to think about moving all your pension savings into one place.’
> Should you merge your pensions? What are the pitfalls?
Six months before retirement
‘Expect a ‘wake-up’ pack including current fund value and a retirement brochure outlining the various options at retirement,’ says Douglas.
‘You’ll be asked to contact your workplace pension provider to discuss retirement options. They will help you to establish the most appropriate options, highlight any risks, and explain the importance of obtaining financial advice.
‘This is also a good moment to talk to Pension Wise about your options at retirement if you haven’t done so already.’
Last two months before retirement
‘You should receive a reminder about your options. Shortly before retirement, if you have now spoken to your workplace pension provider, they will issue a quote and the relevant forms to enable you to apply for your chosen retirement option.’
What free help is on offer
Employers offer services ranging from basic information packs all the way to subsidised financial advice, depending on their generosity and the size of their scheme.
Here’s a rundown of what you might get as you near retirement.
Workshops, webinars and seminars
Invitations to group meetings and discussions, in person or online, are likely to start arriving as the normal retirement age set by your work scheme approaches.
In most jobs, you don’t have to retire then, but it’s important to take account of that date and any rules that might be attached so you don’t miss key deadlines.
Clare Stinton, head of workplace saving analysis at Hargreaves Lansdown, says the retirement seminars and webinars offered to target employees in its work scheme include: ‘Pensions 101’, ‘How to supercharge your pot’, ‘The gender pension gap,’ ‘Your retirement options explained’ and ‘How much cash do you need in retirement?’
Emma Douglas of Aviva says it runs an online seminar through employers under the banner ‘My Retirement My Way’ for scheme members who are aged 55-plus. It lasts around an hour and covers lifestyle, planning finances in retirement, retirement options, and next steps.
Clare Stinton: Wake-up packs are issued to members by pension providers at age 50, 55, 60, six months out from desirable retirement age and two months from the retirement deadline
Personal coaching
‘One-to-one financial guidance via personal financial coaches allows people to clarify their own financial situation and gain a deeper level of knowledge around their options,’ says Jonathan Watts-Lay of Wealth at Work.
‘Financial guidance is particularly beneficial for individuals at retirement when faced with complex decisions around how to best access their pensions and retirement savings.
‘It can act as a gateway to regulated advice for those who would benefit from it, as it can help them recognise all the complex things they need to understand about their finances.’
Stinton says Hargreaves offers members of its group workplace schemes ongoing access to one-to-one consultations throughout the saving phase and when people want to start accessing their money.
Interactive tools
Free pension calculators are everywhere on the internet, but your own work scheme one is a good place to start as it probably already holds the relevant information about your savings to date.
In addition to a pension calculator, Hargreaves offers a drawdown calculator to model different retirement income scenarios.
Similarly, Aviva says it has a retirement planning tool which enables savers to look at various types of retirement income, understand how long their pot could last in retirement, and how it stacks up against the PLSA Retirement Living Standards.
It also has a tax calculator to help inform people of the implications of their decisions.
Annuity service
Annuity deals have soared in value over the past few years, making more people open again to using their pension fund to lock in a guaranteed income for life.
It is worth seeing what your workplace pension scheme has to say on annuities, and what it offers should it have its own products.
But experts stress the importance of shopping around before you make a decision, because the purchase is irreversible.
Hargreaves says it guides members interested in annuities through all available options, and emphasises the importance of disclosing lifestyle factors such as drinking and smoking habits, which can significantly enhance the income you get in retirement.
Wake-up packs
‘Regulatory wake-up packs are issued to members by pension providers at age 50, 55, 60 and then six months out from desirable retirement age and a final one sent two months from the retirement deadline,’ says Clare Stinton of Hargreaves.
She says they are personalised to include pension value and designed to help members understand if their retirement is on track. Once people reach 55, the pack includes a guide to retirement options.
Meanwhile, ‘nudge’ messages might be sent at key milestones, like birthdays and shortly before annual statements.
Retirement reports
This is in the ‘nice to have’ category because not all work schemes will offer them. These ‘non-advisory’ reports allow you to input your pension and savings information, and receive a personalised response about your options.
Subsidised financial advice
Emma Douglas: Aim to build a pension pot of at least 10 times your annual salary by retirement
Again, not all employers will offer a staff benefit like this, but it is definitely worth considering if you can save some money by accessing advice via your work pension.
If you do this, you can also take advantage of the ‘pension advice allowance’, which allows you to take £500 out of your pension tax free to help cover financial adviser fees.
You can do this once per tax year and three times in total during your life.
How to get your pension ready for retirement
Aviva’s Emma Douglas offers the following tips.
1. Time: Start planning and saving as early as possible, ideally at least 40 years before retirement.
2. Amount: If affordable, aim to save at least 12.5 per cent of your salary into your workplace pension savings every month (including employer contributions and tax relief, as well as your own money).
3. Pot size: Aim to build a pension pot of at least 10 times your annual salary by retirement.
4. Tax relief: For every £8 saved towards your pension, the government adds an extra £2 in tax savings.
5. Investing: Understanding investment basics could help you take more control of you later life planning.
6. Keep checking: Annual workplace pension statements can be used to track retirement targets.
7. Online tools: Make use of free online retirement calculators.
8. Reframe expectations: Life expectancy in retirement could easily be 20 years or more. Check the Pension and Lifetime Savings Association’s Retirement Living Standards for what you need for a minimum, moderate or comfortable standard of living in retirement, and the Office for National Statistics’ life expectancy calculator to discover how long you might be retired.
9. Lost pensions: As people change jobs, move home, get married, and lose touch with their pension providers, there is now also a record number of lost pensions. The Government has a free Pension Tracing Service.
10. Financial education: Check if your employer provides any free pension or other money seminars.
What are the pitfalls to avoid at retirement?
There are common pension mistakes people tend to make as they approach retirement, says Jonathan Watts-Lay, director at retirement specialist Wealth at Work.
‘For many, the decisions that are made at retirement may be the biggest financial decision they make in their lives.’ he says. ‘It could so easily go wrong.
Watts-Lay gives savers a steer on what to avoid below.
Jonathan Watts-Lay For many, the decisions that are made at retirement may be the biggest financial decision they make in their lives
1. Withdrawing savings from a pension too early
2. Not investing your pension in line with how you plan to generate an income
> Read more here about pension ‘lifestyling’, or derisking, in the run-up to retirement and whether it suits your plans in terms of buying an annuity or staying invested
3. Not shopping around product providers to get the best deal
4. Failing to look holistically at pensions and other savings and investments like Isas to avoid paying more tax than necessary
> Read our guide to defending your pension from the taxman
5. Not considering whether it is better to merge pensions to ensure a joined-up investment strategy
6. Underspending or overspending pensions by not assessing life expectancy realistically
7. Losing pension savings to scams
> Check our Beat the Scammers page
What pending Government changes could mean for people reaching retirement
The Government has announced plans to make pension schemes offer workers ways to turn pension pots into an income when they reach retirement, not just send them off to find their own solutions,
The Pension Schemes Bill announced in the King’s Speech will require pension schemes to offer retirement products, so people have a pension and not just a savings pot when they stop work, according to the Government.
It will involve placing duties on trustees of occupational pension schemes to offer a solution or range of solutions, including default investment options.
‘This will improve outcomes for savers and is likely to lead to more funds being invested for longer, giving the potential for investments in productive assets – boosting economic growth,’ it says.
External pension scheme providers are already required to provide four ready-made deals to retirees, as they depart work schemes and decide how to turn their pots into an income.
These cover four basic scenarios: not touching the money in the next five years; buying an annuity within the next five years; starting to take an income within the next five years; and withdrawing the entire pot within the next five years.
Jonathan Watts-Lay of Wealth at Work warns the new bill might have unintended consequences, for example if work schemes ‘default’ option only considers a member’s pot held with them and not other pensions or savings and investments.
He points out that savers might have two or three different-sized pensions from previous jobs.
‘Will the pension with £500,000 be defaulted differently to the pension with £40,000?’ he asks. ‘It is the same retiree but will they end up with differing retirement investment strategies as a result?
‘Equally, perhaps they should be ‘drawing down’ on Isa savings or other taxable investments alongside their pensions to ensure they are not paying more tax than they need to on their pension income.’
Watts-Lay is also concerned ‘defaults’ offered by work schemes will discourage people from shopping around for the best deal, in the same way as many retirees used to buy annuities from their existing pension provider.
‘Before any decisions are made at retirement, individuals really need to understand what their options are and the generic advantages and disadvantages of these options,’ he says.
‘Providing financial guidance for members and employees at retirement can help with this and will enable them to make informed choices.
‘Let’s hope the detail is worked through thoroughly otherwise we have set the bar low for retirement income outcomes despite a lifetime of saving.’
Should you consider working for longer?
Working for longer has three advantages when it comes to pension saving, says Emma Douglas of Aviva. Here are her tips.
More time to save
More employee and employer contributions are paid in.
If someone has only contributed pension savings for 120 pay days, adding another 36 pay days by retiring three years later will make a big difference.
More time for existing funds to potentially grow in value
Importantly, those who plan to delay their retirement should let their pension scheme know, so that investment risk is aligned with actual retirement age, and individuals maximise their opportunity for growth and returns.
The term over which income will be taken from a pension will be reduced
This will be reflected in the sustainable drawdown rate, as well as in annuity rates.
How to sort out your pension if you fear it’s falling short
1) If you are worried about whether you will have saved enough, investigate your existing pensions. Broadly speaking, you need to ask schemes the following questions.
– The current fund value.
– The current transfer value – because there might be a penalty to move.
– Whether the pension is in a final salary or defined contribution scheme. Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – career average or final salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
– If there are any guarantees – for instance, a guaranteed annuity rate – and if you would lose them if you moved the fund.
– The pension projection at retirement age. You can use a pension calculator to see if you will have enough – these are widely available online.
2) You should add the forecast figures to what you anticipate getting in state pension, which is currently £221.20 a week or around £11,500 a year if you qualify for the full new rate. Get a state pension forecast here.
3) If you are tempted to merge your old pensions, read our guide first to ensure you won’t be penalised.
4) If you have lost track of old pots, the Government’s free pension tracing service is here. Our retirement columnist, Steve Webb, has a guide to finding lost pensions here.
Take care if you do an online search for the Pension Tracing Service as many companies using similar names will pop up in the results.
These will also offer to look for your pension, but try to charge or flog you other services, and could be fraudulent.
