When pension freedoms were introduced by the government in 2015, they ushered in a new era of choice for customers, promising more control over how people manage their pension funds.
Five years on and prompted by the government’s recent announcement that the age for accessing pensions freedoms will be raised from 55 to 57 in 2028, many people may now be thinking about how they will want to access their pension pots.
Financial advisers can play a key role here in helping people understand their options and prepare for the years ahead.
Being honest about pension freedoms
Since their introduction, pension freedoms have been a welcome option for many over-55s seeking greater flexibility in how they manage their pension funds before fully transitioning into retirement. The idea of accessing cash pre-retirement has certainly been popular, with more than £35bn having been withdrawn by savers since its introduction, according to figures from HM Revenue & Customs. However, as the cost of living goes up and we see average retirement ages in the UK steadily increasing, this is where expert input from financial advisers is most crucial.
It’s now more important than ever that people are clear about the risks of withdrawing from their pension early. Encouraging clients to visualise the kind of retirement they want and considering whether taking advantage of short-term gains is going to negatively impact their quality of life in the long-term is vital. And with life expectancies extending and retirement often stretching into the 20-plus years, the risk of being caught short in later life is a real threat.
With this in mind, financial advisers are in a unique position to be able to help individuals take a holistic look at their pension pot, so having these conversations early on and ahead of time can be pivotal in ensuring that people don’t make the wrong decisions for a short-term boost.
Helping near-retirees think longer-term
Financial advisers will know well that approaching retirement can be a stressful time for many over-50s – particularly if they aren’t as well prepared for retirement as they would like to be. Scottish Widows’ most recent annual Retirement Report found that nearly half (45%) of over-50s fear running out of money in retirement, illustrating that this is a time that many will be looking to have those difficult conversations about what they can do to manage their finances better in the years approaching retirement.
When it comes to retirement income, the important things are ensuring a guaranteed income and offering flexibility. Proposing an annuity (based on the unique needs of your client) is one way to offer this. Surprisingly under-used, with only 9% of over-50’s planning to purchase an annuity product according to recent Scottish Widows research, the role of financial advisers in helping individuals choose the right product for them is essential.
While the introduction of pension freedoms created a new way of giving people more direct control over their pension funds, fewer people may be aware of the benefits of an annuity to provide financial stability throughout retirement. Giving people confidence that they will have access to a defined income throughout retirement – potentially as long as they live – can be hugely helpful to people anxious about their financial security later in life, and a good alternative to dipping into their pension pot prematurely.
Taking a flexible approach
This said it’s important to think about pension management on a case by case basis. The reality is that it’s often not a simple choice between withdrawing cash or taking out an annuity. Increasingly, people choose to combine these approaches in a way that works best for them. Giving clients the option of having a guaranteed income for life (via annuity) that meets their basic living costs, as well as a separate pot to access for little luxuries or unexpected expenses, could provide them with the best of both worlds. Particularly as pension pots increase in size thanks to the success of auto-enrolment, taking a flexible approach like this is becoming increasingly popular.
As pensions rules and regulations continue to change and flex with ongoing social uncertainty and the continued anxieties produced by the Covid-19 pandemic, quality financial advice has become more important now than ever.
Though the profession is operating in a new way given the restrictions on workplaces worldwide, the need for this community of professionals remains.
Offering measured and informed guidance on how to navigate complex financial questions like how to access or manage your pension pot has unlimited value and can help ensure that everyone experiences quality of life in retirement.
Siobhan Barrow is head of individual distribution at Scottish Widows