Those in defined benefit schemes are spared organising their own retirement income. But the dramatic switch in recent years towards defined contribution arrangements, where the onus is on the employee to make their own income arrangements, has created a scenario where more and more retirees are facing decisions they are simply not equipped to manage alone.
Trustees of such occupational schemes do have a duty to inform employees of their income options in the run-up to retirement. At present this extends only to ensuring they receive a slim official booklet focusing primarily on the steps they need to take when buying a lifetime annuity. As a marketing tool for the lifetime annuity sellers it is highly effective. But as a practical guide to choosing and shaping a retirement income from the many options available in the 21st Century marketplace, it is sadly lacking.
Does any trustee genuinely believe it is sufficient to enable employees to make informed decisions at a complex stage of life where poor decisions can have long-term consequences? How long before disgruntled employees twig they’ve only been told half the story and try to take action against those who failed to outline all their options?
The booklet – Your Retirement Options – prepared by the Pensions Regulator, was first published in 2005 and revised for 2006. In the three years that have passed, innovation has been rapid. One example is fixed-term annuities which deliver guaranteed income for an agreed term then allow the retiree to choose another plan, potentially allowing them to secure higher benefits if their health deteriorates through retirement. Variable annuities should also be mentioned – sales last year more than doubled to £1.1 billion making them a highly significant player in a £14 billion market.
These innovations are aimed at bringing choice and flexibility without the many risks of income drawdown to a more mainstream market, not just the wealthy. The Pensions Regulator suggests other options ‘may only be suitable if you have a pension fund of over £100,000 and are comfortable taking some risk with your fund’. But these days unsecured pension arrangements do not have to be risky or costly and many people would actually value being able to maintain control and flexibility to react to changing events through the two or three decades they will on average spend in retirement.
Realistically, any trustee relying on a booklet to help their members retire is only doing the bare minimum and that is nothing to be proud of. This is particularly true at times of economic turmoil – this year nearly half a million people will buy a retirement income product, the majority ‘choosing’ a lifetime annuity that will lock them into the uncertainties prevalent in 2009 for the rest of their lives.
There is a better way – encapsulated in the OMO – Offer More Options ‘campaign of change’ (www.offermore options.co.uk) that we believe has the power to fundamentally improve the way retirees take benefits from their pots. It firstly depends on making sure that those approaching retirement are made aware of a full range of solutions, so that they can make active decisions at the optimum time to suit their own needs. It also promotes the value of independent financial advice, not only in the run-up to retirement but through retirement.
The campaign aim is to create an industry-wide lobby who share a common goal in improving the retirement outcomes for millions of people in the coming years. One objective will be to encourage employers and trustees to take their responsibilities to retiring staff far more seriously, perhaps by pushing for incentives such as tax-relief on retirement advice.
It is still in its early stages but momentum is gathering with more than a thousand advisers and some forward-thinking providers of non-standard retirement income solutions already on board. But this is a huge issue that needs all the support it can get from those who can make a difference, including employers and trustees who have an interest in reaching the same objectives.
Employers and trustees cannot give advice themselves. But they can be encouraged by the Offer More Options campaign to see the clear benefits of giving their employees access to the specialist support of a corporate IFA who does have the market knowledge and experience to deliver better outcomes for thousands of retiring staff.