01 Oct 2021

How to help employees of every age plan for their golden years

Retirement is a monumental event in anyone’s life. Not only does it have far-reaching financial implications, it is also a major lifestyle change that can have consequences for people’s mental and physical health. That’s why it needs to be taken extremely seriously, both by employees and their employers.

When employers are providing information for employees around planning for retirement, it is important to cover:

1. Pension allowances

Pension allowances are the amount that employees can save tax-free in their pensions on an annual basis and over their lifetime. Currently the standard annual allowance is £40,000, however if an employee has taken a taxable withdrawal from any of their pension plans since 2015 they could be subject to a reduced annual allowance of only £4,000, known as the Money Purchase Annual Allowance. When more than that amount is saved, a tax charge might apply. Since the charge could be significant, and employees may not have planned for it, they could find that hard to fund.

Employees who earn more than £200,000 a year may have more restricted tax relief, known as the tapered annual allowance.

Every employee has a pension lifetime allowance – currently £1,073,100. Any excess savings above this amount will be subject to additional tax charges.

2. Investment strategy

Employees who save into a workplace pension scheme may not necessarily understand how their money is being invested. Often their money will be automatically invested in a default fund, but there may be other options that would be more suitable for certain employees – perhaps those with a high-risk appetite or those who favour an ethical or socially responsible approach.

3. Lost pensions

During the course of their careers, employees are likely to have accumulated different pension pots with different employers. When they retire, they will inevitably want to access these pensions and so they need to keep track of them. They may even want to consolidate the funds from these multiple pensions into a single pot, or transfer them into their existing workplace pension. Before doing this, they should understand and consider the benefits associated with their pensions, as well as any potential penalties and charges associated with moving the funds. Employees who have lost pensions can use the Pension Tracing Service to track down missing funds.

4. Retirement decisions

At retirement, employees have some important decisions to make about how they use their pension pots. In the case of defined contribution (DC) pensions, employees can choose whether to take a portion of their pot tax-free, use some to buy a guaranteed income in the form of an annuity, withdraw amounts from the pension as needed, or do a combination of these.

With defined benefit (DB) pensions, employees have pre-set retirement options. They can choose whether they want to take the full DB annual pension or commute a part of it to take as a lump sum at retirement, claiming a lower annual pension thereafter. Alternatively, they can also consider whether they want to transfer their pension to a DC pension for more flexible retirement options. However, for the majority of employees, taking benefits from their DB scheme will be the most appropriate option.

Funding retirement is about more than just a pension. So it is important that employees consider how they can use all their savings and investments. Some might choose to use up other savings initially and keep their pension invested, allowing it to keep accumulating.

Employees will have taken a lifetime to build up their savings so, when it comes to retirement, they need to make the decisions that are right for their own personal circumstances. Giving employees unbiased education immediately before retirement –

and making sure they know how to access information, guidance and advice – is vital to protecting them, as well as the irreplaceable benefits they have accumulated.

5. State Pension

In addition to the funds saved into their workplace pension scheme, employees will be entitled to claim the state pension once they have reached the appropriate age. They will not receive the state pension automatically, however – they will need to claim it. The actual amount received will depend on their National Insurance record.

6. Wills and estate planning

While they remain invested, funds in workplace pensions are not legally part of people’s estates for inheritance purposes. They are not therefore covered by wills. So it is essential that employees inform their pension providers of their preferred beneficiaries using an expression of wish form. If an employee dies before the age of 75, the beneficiaries of their pension fund will not need to pay tax on any lump sums or withdrawals from DC pension schemes, however a spouse’s/dependent’s pension from a DB scheme will always be subject to income tax at the beneficiaries marginal rate of tax.

7. Health and wellbeing

Alongside financial matters, employees should consider some of the other implications of retirement, including what age they want to retire at, how they plan to spend their time and what they will do to stay fit, connected and fulfilled.

Many people find no longer being in the workforce a shock to the system, which can negatively impact their mental and physical health. By planning ahead, and giving thought to the best time to retire, as well as how they want to spend their retirement, employees are more likely to get the most out of their golden years.

Finally, it should be remembered that retirement decisions are not necessarily black and white, or indeed a single decision that will stay the same for the next 30 years. Employees’ choices and plans will invariably evolve throughout their career. So it’s crucial they remain flexible in order to respond to changing circumstances, such as coming into an inheritance or needing to plan for care costs. Also, if employees have a partner, their retirement planning should be done jointly – not just in terms of finances, but also with respect to whether or not they want to coordinate their retirement dates.

Why now?

The recent uncertainty associated with Covid-19 has led many employees to pay greater attention to their finances. Indeed, our Expecting the unexpected research found that because of the pandemic, more than half (56%) of employees at large organisations had already improved their financial preparedness, or had plans to improve it in future.

Employees’ increased interest in financial matters make now a good time for employers to launch, or step up financial education programmes. Amid the ongoing skills shortage, they can use these programmes – combined with their own incentive packages – as a platform for attracting, engaging and retaining talent.

This article is provided by Close Brothers Asset Management.