Avoiding pension accidents
Those accessing smaller pension pots, who are more likely to take all their pension as cash at retirement, need greater protection to avoid costly mistakes at retirement
Guiide provides help and guidance to thousands of people each month through its free consumer site and branded and customised versions for employers and schemes.
When first launched, Guiide was optimised for the demographic of the hundreds of thousands of people who happened to find and use the consumer site in the first two years.
Guiide achieves superior engagement through a quick user journey taking less than 10 minutes and delivering a practical outcome. The result is a completion rate of 40%, far exceeding other retirement planning tools we know of.
Earlier Guiide users tended to have savings and income sufficient to provide a moderate viable long term drawdown plan. For them, Guiide automatically produces a sustainable, tax efficient, retirement income plan incorporating everything they have. The plan is tested for adverse circumstances and then becomes a living, trackable and adjustable plan for the retiree’s lifetime
As adoption of Guiide has grown, the user demographic has widened. Tailored journeys have been created to maintain high engagement for all users of Guiide.
We have particularly looked at vulnerable individuals who may have low earnings, are part time workers or come in and out of the workforce (in retail, not for profit, and social and housing sectors).
Subsequently we are now developing journeys in Guiide to address the needs and circumstances of these vulnerable groups.
Protecting those with lower pots from adverse outcomes
Evidence shows many of these savers will take their pension pot as cash in one go. ‘Grabbing’ the money, so that they feel it belongs to them. This can in many cases have adverse consequences :
Overpayment of tax - taking cash at retirement whilst still working can lead to overpaying tax when there is no need. At minimum, these consequences need to be explained and understood.
Reduction of benefits - For those on means tested benefits, taking cash or additional pension income before State Pension Age can materially affect benefits depending greatly on how the money is spent or saved.
Unsustainable income - removing the pension pot taken as cash from the overall amount being used for retirement could mean pension poverty in the future.
A sustainable retirement future is possible if well understood
Education on factoring in ALL sources of income - projecting even the modest current pots and future contributions along with the State Pension and other income like part time work can evidence a sustainable viable income in retirement.
Understanding the effect of decisions - taking cash may not be an unwise decision if someone has other incomes (old DB pensions for example) or other large pension pots to provide a sustainable income. This may also be the case if adverse tax and benefit consequences are not apparent. However, if other sources of income are not there and/or these adverse consequences are, then they can be seen as clearly unwise.
Simple choices - personalised guidance
The industry fails people at retirement because it essentially offers three ‘product’ choices - cash, drawdown or annuity. That makes it easy for lower earners to jump to ‘cash’.
The choices need to make sense to the saver using language more understandable to them. Once engaged,simple and short steps that signpost dangers and lead to meaningful guidance can be used.
At retirement there are essentially three choices -
Savers initially choosing Option 1 can be supported to understand the consequences of their actions on a viable later retirement income, tax overpayment and loss of benefits.
If there is an adverse outcome at this point, there’s a good chance of drawing their attention to Option 2 for preferable outcomes, and then finally Option 3 if adverse outcomes still exist.
Engage, protect and direct
Personalised guidance, understanding of the choices and protection from self harm is ONLY possible when all the saver’s resources are factored in…this is not just about a one pot question.
Engagement provides information about members and is valuable to sponsors and trustees
As well as providing more tailored and helpful guidance for the real issues facing these savers, this approach provides valuable information to the scheme.
Wishing to help their members, it is of great concern when extremely high numbers of savers take Option 1…but worse still is not knowing for how many it created adverse outcomes.
The approach proposed reveals precisely the number taking action in the knowledge that this may be against their best interests.
Knowing that, sponsors and trustees can take further steps to educate, or provide other solutions to help people avoid taking these actions.
As an example if 90% are taking cash, the journey above may show only 40% do so with adverse expected consequences. It is the actions of these 40% which can be concentrated on. From these can we understand the common themes arising. Armed with that information, campaigns and solutions can be devised to reduce that number further.