The topic of retirement savings has had a lot of publicity recently. The introduction of the auto-enrolment scheme was accompanied by a series of adverts highlighting the importance of “saving for my pension”. The withdrawal of the requirement to buy an annuity has also made headlines and sparked plenty of debate. The ability to leave part of a pension fund invested while withdrawing some income from it (known as income drawdown) gives retirees new options for financing their retirement. At least, that is the theory. Those with workplace pensions may find that the reality is somewhat more complicated. Please note prior to taking any action it is extremely important to seek advice on pensions and transferring them before you do so.
Workplace pensions – an employers perspective
All employers have to comply with the requirements of the auto-enrolment scheme. At this point there is nothing which legally requires employers to run workplace pension schemes which support income drawdown. This means that businesses will look at the matter from a cost/benefit perspective in the same way as other business decisions. Companies which are introducing workplace pension schemes purely because they have to, arguably have little incentive to look beyond the cheapest and/or simplest option which keeps them on the right side of the law. Companies which view workplace pensions as a means to attract and retain staff do have to consider the issue of employee satisfaction, but this has to be balanced against any costs and resources involved.
What this means in practice for people currently saving towards a workplace pension
For those who currently have some time to go before retirement, it may be far too soon to make a definite decision as to whether or not income drawdown is the right way to go. It may, however, be the perfect time to see whether or not the existing workplace pension scheme supports income drawdown and if not if there are any plans to change it so that it does. If the answer to both questions is no, then it may be worth seeing whether other people would also like this option and if so speaking to management/HR about the matter.
What this means in practice for people close to retirement
If you’re close enough to retirement to have made plans which involve either income drawdown or simply leaving your pension pot invested for some time after your retirement from paid employment, then it can be very helpful to check just how that pension pot is being invested. If the management company is working on the assumption that you are going to be buying an annuity in the near future, they may well be pursuing a different investment strategy for you than they would if they knew that your plan was to keep your pension fund (or part of it) invested over a longer period. It is probably also a good idea to check with whoever is managing your progress towards retirement, what the process is for transferring your pension pot to a provider who does support it and how long it will take.
One last and very important point
As we mentioned at the start of this article, the changes to income drawdown is new and exciting and has generated a lot of interest. Now everyone over 50 has the option to drawdown their income. For some people it is a superb way to finance retirement. For others, however, annuities or an annuity plus a lump sum may still be the more appropriate options. Either a lump sum or the income from an annuity can be invested however the retiree sees fit. For some people this approach may provide a better balance of flexibility and security.
Income Drawdown carries significant investment risk as your future income remains totally dependent on your pension fund performance.
The value of your investment and any income from it, could fall or rise and you may not get back the full amount invested.