The recent ‘Get Retirement Right’ report issued by TISA has found that there are an additional 8 million people from the private sector now investing in a pension thanks to Auto Enrolment. People who perhaps would otherwise not be saving for their retirement or investing at all are now putting some money aside. This is clearly a very positive outcome from the auto-enrolment initiative. Many believe there is more to be done to get even more people saving as early as possible for their retirement.
There are concerns though around the knowledge level of these new investors and whether they fully understand the investments, what it means in real terms, how much money will they have in retirement.
Employers are required to make a minimum contribution amount on behalf of their eligible employees with this ticks the box in terms of keeping within regulation though the employer doesn’t need to consider an individual’s retirement desires. This sits on the shoulders of the employees and increasing the personal contributions to help achieve their retirement objectives. Many could be left with a shortfall at retirement having not realised that they are responsible for planning themselves and adapting their saving accordingly. Most auto-enrolment schemes will use a default investment portfolio that will not suit everyone’s appetite for risk and has a lower return potential. The defaults can be changed but are these new investors going to understand this enough to adjust and increase potential growth to an investment strategy that meets their personal view and capacity for loss?
Investment decisions and investing the right amount can be difficult enough but is only the tip of the iceberg when you consider the personal decisions that can be made from aged 55 years. An individual will need to consider if they want to start drawing an income from their retirement pot or take the tax-free cash lump sum, or both. They may want to take any money at that time and leave it invested but change their investment strategy to minimise risk of losses. They can also consider a product to offer them guaranteed income. The nervousness around making the wrong decision is immense. I relate this back to my own family, my parents having reached this milestone in recent years, and the discussions they have had from correspondence received relating to their retirement pot. A lot rides on making the wrong decision coupled with the uncertainty of what lies around the corner. Investment Pathways are a step to help address this for the non-advised market but I think the same challenges will exist when reaching this milestone, even with the options set out.
TISA has issued a set of recommendations, one of which is for solutions to be developed to increase customer engagement with their pensions and for appropriate financial guidance and advice to be available.
Where should the responsibility sit? Should employers be signing up to some knowledge and training to give their employees the tools they need to look after their pension and make the right decisions? Or should the government be responsible?
According to the FCA’s 2018 Baseline Report, only 8% of the adult population receives advice each year.
What can be done to educate people?
A recent survey completed by simplify consulting told us that a significant amount of people do not and have not ever sought advice. What can be done to help these millions of people facing life changing decisions. Our survey X amount of people felt the money they had didn’t warrant advice. Again we come back to that key nugget of information, an investment made right can make the difference.
What are your thoughts, what do you think can be done to help?
Written by Jayne Brown – Consultant at Simplify Consulting