Much of the conversation in the employee benefits world that touches financial wellbeing tends to focus on managing stress through better financial awareness and debt management solutions. While these are crucial services, it can mean that focus is shifted away from the financial wellness of people who are preparing for retirement.
Leaving employees to their own devices at such a critical stage of their financial lives can have disastrous consequences, particularly unnecessary taxation paid by people accessing their pensions. A good measure of this was the predicted £400m extra income forecasted to be received by the Treasury in the 2018/19 tax year.
When the Office of Budgetary Responsibility (OBR) published this forecast in October 2018 it cited the fact that “earlier cohorts are drawing down their pensions for longer” as the main reason – in other words people are paying tax on their pensions when they might not need to do so.
It’s easy to see how that happens as well. Legal & General research found that 1 in 4 over 55s didn’t know they have to pay tax on their pensions.
27% of people think they can access their pension pot tax-free, potentially leaving them facing higher tax bills than they had planned for.
1 in 4 over 55s didn’t know they have to pay tax on their pensions.
46% of over-55s wouldn’t take any risk with their pot and 73% would avoid any ‘big risks’ to their pension.
What can employers do?
Provide financial education to help people understand the rules
Understanding taxation rules will go a long way to mitigating the possibility of paying unnecessary tax. A targeted financial education programme aimed at those approaching 55 and over can get them in front of the situation and in a position to make informed decisions.
Make them aware of pension scams
The fastest way to losing pension income is to fall for a scam. Unfortunately, more than £23m was lost to scammers in 2017 and there’s little chance of that money being returned. Wren Sterling has an article with tips on avoiding pension scams to help you support your employees.
Explain their pension options at 55
Much like explaining the rules, explaining the options for withdrawing pension income at 55 will make your employees more aware and cause them to pay greater consideration to their overall retirement plans. It will also help them to wrap their head around industry jargon that plagues pension options – such as an uncrystallised funds pension lump sum, annuity and flex-access drawdown.
Offer independent financial advice
Understanding the rules and options is one thing but that still leaves plenty of room for error when it comes to building a retirement plan. An independent financial adviser can highlight pitfalls and ensure your employees shop around for the most appropriate retirement income options to meet their individual circumstances and aspirations. Not to mention ensuring no unnecessary tax is paid.
One advantage of working with Wren Sterling is access to our private client team. With over 70 advisers nationwide plus a telephone-based advice helpline, we’ve got the capacity to cover group or individual financial advice exercises.
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Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
The tax rates applying are subject to the individual circumstances of the investor and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice.