We all face decisions every day – what to have for dinner, whether or not to go to the gym – but how many of these decisions materially affect the quality of our future? Imagine having to make decisions that do materially affect your future without having sufficient information and understanding?
Studies have shown that around 40% of adults cannot understand basic mathematics. Yet pension professionals expect to be able to talk about annuities, cash commutation and income drawdown with an understanding audience.
Are we doing enough to support individuals at retirement?
In the defined benefit landscape (yet more jargon) individuals have a number of complex decisions to make at retirement.
- Do I exchange pension for cash? The rate at which this can be done will determine how valuable (or not) this benefit is (as well as how long you will live) – are individuals mathematically minded enough to understand this? I expect not.
- When should I draw retirement benefits and from which arrangement– how do individuals assess value?
- Would a transfer to a defined contribution arrangement make sense to access new flexibilities in this area? There are lots of points to consider (see my recent article on ‘What Drives People to Transfer?’) and the decision is not a simple one – although the requirement for individuals to take financial advice for transfers above £30,000 provides a helpful structure.
- Finally, many schemes are now trying to provide more flexibility at retirement (pension increase exchanges, partial transfers etc) but with this comes added complexity, jargon and choice.
Many of these decisions are one-off choices which can’t be re-visited, and decision taken at one point in time may not be the most suitable at another. How do we help people make the best decisions about their retirement options?
Ultimately individuals will need help to make informed decisions. At the simplest end, this could be via communication provided in an accessible way. For more straight-forward choices, decision trees or financial guidance may be enough to achieve the right result.
For others the complexity of their pension arrangements or indeed their personal circumstances may require experienced financial advice. So how do individuals access this advice and avoid falling into the hands of the unscrupulous? Individuals need to be much more questioning of any offers they receive. Often a pension is the largest asset an individual may have, individuals therefore have to be sure who to trust – a professional glossy website does not always mean the appropriate due diligence is being carried out.
At the most basic level individuals can use the www.unbiased.co.uk website to find financial advisers in their area. Recommendations from friends and colleagues can help as can support from employers and pension scheme trustees.
There is a material risk that bamboozled with options, individuals may just chose the simplest option which may not be the most valuable. There is undoubtedly a place for support through employers and pension schemes providing security and validation. This can give access to quality advisors and a straight through process that makes it easy for individuals to make informed decisions. There is also great potential to better use technology to get key information out there in an accessible way.
Thankfully, the market does seem to be reacting to this need with member engagement packages coming onto the scene. Depending on providers, individuals can have online access to information when and where they need it and access educational tools such as videos to explain key options. This can then be linked to access to reputable, experienced financial advisors, overall resulting in a more supported straight through process.
I expect this will be the norm in the years to come and I am hopeful that the result is better informed individuals, and better decisions at retirement.