How you can help your members make better retirement decisions 

Your pension plan members are making poor decisions with their pension funds at retirement – How can you support them in making better decisions?

Pension plan trustees and  corporate sponsor often spend countless hours and fees with the aim of ensuring their members have enough saved in their pension plan to be able to retire with a reasonable level of annual income . This focus is on members’ accumulating wealth to support them through retirement (and rightly so!). However, the value of this focus is all too often undermined by poor decision making at the point of retirement, meaning the value of pension contributions paid over the course of an employees’ membership of the pension plan being eroded and members not receiving the retirement income they need.

FCA research* has shown that once people reach retirement 56% of all pots are being cashed in entirely on first access, when leaving some funds in the pension might have led to better investment returns and a lower tax bill and 40% of members who are utilising drawdown are doing so at an unsustainable rate (8% or more of the pot per annum).

Support for members at retirement has been a thorny issue for Trustees and Corporates. Retirement packs are issued and members are typically signposted to Money Helper or to consider taking financial advice before they make one of their biggest financial decisions  that will impact the rest of their life. The FCA research highlights that 2/3rds of members accessing there pension pots for the first time in 2021/2022 did not take regulated advice.

Trustees have typically been nervous about appointing a Financial Adviser to support members at retirement, given the potential for remediation if the advice turns out to be inappropriate. The FCA statistics make it clear that a large number of members are making these decisions with little or no guidance or advice.

As retirees with an element of defined benefit pension provision decline, members who only have defined contribution pension provision (or their defined contribution pension is the larger part of their overall pension provision) are increasingly having to make complex decisions about how to withdraw their income in the most tax-efficient manner. Without the right education and support, this is a difficult task for even the most financially aware individuals.  

This issue is a concern, so much so that the Government announced in its 2023 Autumn Statement, that it is looking to legislate in this area and the Regulator is currently undertaking a series of round tables to fully understand the challenges so that it can formulate guidance on how Trustees and Corporates should be supporting members at retirement. 

A key part of the problem is that many members do not understand how to translate their defined contribution pension saving into a sustainable income in retirement. This is borne out in the FCA statistics  that 40% of members using a drawdown solution are withdrawing savings at a rate of 8% or more of their pension pot per annum. 

Education is key in helping members plan effectively by providing them with access to simple and engaging planning tools to make smart, tax efficient decisions. By taking members through a logical planning journey to help them understand their income needs in retirement and how their retirement savings (plus the savings of their spouse) will support their income needs through retirement, trustees and sponsors can support their scheme members in making better decisions.

Discover Mercer’s Destination Retirement, an award winning, FCA regulated, retirement planning tool that is helping scheme members make better decisions with their pension funds at retirement.

* FCA Retirement Income Market Data 21/22 and ONS (Pension Wealth: Wealth in Great Britain).

Gary Gore

- Partner, DC Consultant

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