The government’s pension reforms aim to provide greater freedom, flexibility and choice to better engage workers in lifetime savings. In particular there is now the ability for people to 'drawdown' part or all of their pension as and when they need it, rather than take the traditional route of purchasing an annuity and being paid a set amount for the rest of their lives.
Drawdown allows you to take a taxable income from your pension fund while keeping the rest of the pot invested for growth. The first 25% of a pension can be taken as a tax-free lump sum from the age of 55. However, the remaining income is subject to tax in a similar way to a salary – regardless of whether it is taken as a drawdown or annuity.
The greater freedom from reforms is broadly welcome but according to LifeSight's Factor 55 research around two-thirds of UK workers have little understanding of the reforms or how they are personally affected. Therefore organisations must take a leading role in providing guidance and support to employees. By helping staff make informed decisions about retirement, HR professionals can enhance an organisation’s reputation as a responsible, caring employer.
In educating staff about the reforms, employers will particularly need to ensure workers understand the pros and cons of drawdown. There are several advantages of using drawdown to access pension savings. In a nutshell they are:
- Individuals can retain control of their pension funds – they can take an income (or choose not to) depending on their specific needs
- People have the opportunity to earn additional investment returns on their funds in a drawdown arrangement
- One-off withdrawals can be made when it suits them
- When the member dies the rest of the pension fund can be passed to their dependants
However, there are also a number of disadvantages:
- There are no guarantees of future income for savers. An annuity ensures a pre-determined monthly income for life whereas drawdown funds do not
- If too much money is drawn members’ incomes may not be sustainable over the longer term of retirement
- People’s funds remain invested so their value may go down as well as up, affecting how much they can withdraw
- Greater flexibility for members also means they have to manage their money more carefully during retirement
Although many people are aware of the new pension flexibilities the Factor 55 research demonstrates that they need more guidance on how these reforms will affect them. Employees are increasingly expecting transparency, insightful advice and scheme flexibility from their employers. There is a great opportunity for HR to take the lead in providing staff with suitable information, guidance and support.
Equipped with the right tools, companies will be able to support their workforce, allaying fears and helping people plan for the future they want. Businesses that lead the way on supporting their staff on pensions will reap significant benefits in terms of retention, recruitment and reputation.
Fiona Matthews is managing director of LifeSight, Towers Watson’s master trust
