Administrators protecting members from self harm
Cashing in pensions - what’s the problem?
Over 60% of savers take their pension pot as cash; in industry sectors like retail this number can be well over 90%.? Should administrators just pay the money out efficiently or ought they ensure members in workplace schemes are not coming to financial harm.
Particularly for those on lower incomes there is a risk of overpayment of tax from cashing in;? if they are still in work then there could be a material impact on means tested benefits; and the temptation to just spend the money when it’s in the bank could mean poverty in retirement.
It could be that it’s not an issue.? Someone with a guaranteed income from another workplace pension scheme along with their state pension may evidence a sustainable retirement.? But they need to easily see this - how everything they’ve got can be used for the rest of their lives.? With this complete view, including income from work, then it’s possible to alert someone of the potential problems they may run into.
The pensions industry fails people at retirement because we offer three ‘product’ choices - cash, annuity or drawdown.? To many people, it’s just cash that is readily understandable.? We might try to use different language to explain an annuity or drawdown.? But then explaining the ways these could be used in combination becomes baffling to people.? We are starting at the wrong end - stop talking about the products and help people solve their problem.
What can administrators do?
Start with the retirement options in language that people will understand.? Essentially the options are -?
Once engaged then it’s possible to help someone go through a short process to determine their best outcome.
If the process starts with ‘take all my pension pot as cash’ then help them to understand the possible risks of not having a sustainable income, overpaying tax or losing benefits.
Alert to the risks in their personal circumstances could lead someone to consider the second or third options.
Engage, protect and direct
Administrators will be worried that the process to engage, protect and direct will cross the advice line.? This is all achievable with personalised guidance and can be done consistently through a digital process.
Personalised guidance, understanding 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.
As well as providing more tailored and helpful guidance for the real issues facing savers, this approach provides valuable information to the scheme (and trustees) - understanding the size of the problem of how many proceed with causing themselves financial harm.
Directed through this process digitally will reduce the workload of administrators.? Not just the process itself but relief from members pursuing administrators with questions and clearer unwavering decisions from members (for their best outcome).?