Monday, 16 July 2018

    This story is brought to you by Pensions Insight

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    Five mistakes savers make and how schemes can help them

    From property to parlance Sara Benwell explores how schemes can help their members overcome five common pensions misconceptions

    1) “My pension is my property”

    The competition between ISAs, buy-to-let properties and pensions products has never been fiercer. In fact, ONS data shows that almost 45% of us see a property as the best retirement investment, followed by a quarter who think it’s a pension.

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    Some people plan to use buy-to-let properties to fund their retirement as an alternative to saving towards a traditional pension pot. More worrying is the trend towards people hoping to ‘cash out’ their pensions to invest in property in the hopes of generating enough income to fund retirement.

    What should schemes do?

    Fortunately for those trying to convince members to take a balanced view of property as an alternative to pensions, the Chancellor has made buy-to let investments less attractive.

    He’s removed wear and tear allowance, the tax relief landlords receive on mortgage interest payments will be cut from 75% to 25% in 2019-20 and 3% in extra Stamp Duty has been added to buy-to-let purchases.

    Schemes should advise members to maximise their pension savings and highlight the valuable tax reliefs that are available.

    Figures released from Aegon showed that a typical pension fund has returned 2308% since 1983 while residential property has returned 644%.

    Highlighting statistics like these and making sure members are aware of employer contributions – essentially giving a 100% return on their money before investment - can help members understand the value of pensions savings.

    2) “I’m a risk averse person”

    When people think about investments many are put off by what they see as the risks of gambling on the stock market. This attitude is then exacerbated by a mistrust of the pensions industry generally. And many people have taken ‘risk attitude tests’ for instance for ISA products - leading them to eschew pensions because they believe they are risk averse.

    But we all know that the construction of someone’s portfolio should have less to do with their risk tolerance, and more to do with how old they are. 

    In fact, it is often riskier for a younger member to be invested in conservative assets as they may not see the returns they need when they still have time to ride out the volatility.

    What should schemes do?

    Education of members is crucial. We need to re-characterise risk and help people to better understand what their risk profile should look like and at what age.

    Schemes can demonstrate their risk strategy, and show how lifestyling or target-date funds approaches in workplace pensions are designed to give members the best possible outcomes.

    Schemes should look to communicate with younger members stressing the difference that saving even a little extra can make to an end retirement fund. Easily accessible online calculator tools can help people visualise this.

    3) “Use it or lose it”

    Many savers are champing at the bit to access their tax-free cash. For those who have debts which need to be paid off this can make sense, but for others taking the cash out is often a mistake.

    We all know that there’s absolutely no point in taking out money and putting it in the bank. But there is evidence that suggest many members are considering doing just that.

    This means many retriess will stunt the growth of their savings as they are unlikely to beat inflation year on year (not to mention losing out on a bigger tax-free pot if their money is allowed to grow).

    What should schemes do?

    Suggesting that members call Pension Wise or even take financial advice could help them better understand all the options available when it comes to freedom and choice.

    Schemes could also help educate members themselves. The 25% tax free cash allowance is well-known and ingrained in people’s thinking about how they are likely to take their money.

    Pensions managers can stress that the tax free amount can be spread over a number of withdrawals over time or can be delayed until a member is ready.

    Schemes could also rethink some of the language in member comms and use software tools to clearly demonstrate the different options to members.

    4) “I don’t need advice!”

    Many people think that they either don’t need or can’t afford independent financial advice; a problem that has been exacerbated by confusion between guidance and regulated advice.

    The regulatory distinction between guidance and advice means practically nothing to the typical member and there may well be frustration in cases  where schemes are reluctant to answer the question “so what should I do?”

    Despite this, many members are unwillling to fund an IFA themselves, even when they can use cash from their pension to do so. 

    What should schemes do?

    Members can’t be made to take advice, but consistent and clear messaging on the benefits of advice could help. Including this in all messages might be a good place to start.

    Research from Unbiased.co.uk shows that taking financial advice on savings can add £48,279 to an average retirement pot. Using figures such as these can help to demonstrate clearly why advice is a good idea.

    Some schemes may want to go further by putting advice in place for members or by having an adviser available: Ideally, schemes can signpost where members can get individual advice, and negotiate attractive fees for their members.

    5) “Je ne parle pas pensions!”

    One of the biggest communications issues for pensions is that people approaching retirement are often reading the same information expressed differently in a variety of different places.

    Would-be pensioners are getting bombarded with information from providers and trustees. They may also be receiving communications from the employer as well as government adverts about Pension Wise and comms from TPAS. 

    And this leads to huge disengagement. After all, it’s well and good offering a market-leading pension scheme, but if the employee doesn’t understand how it works or what they need to do to make the most from it, they’re less likely to join in, sign up or increase contributions.

    What should schemes do?

    The answer lies in the pensions industry as a whole working together to develop a consistent lexicon. This should include phrases to avoid as well as alternatives for confusing terms like ‘risk attitude’ or UFPLUS.

    But schemes need to look at their own communications as well. Confusing terminology and conflicting advice is a major barrier to effective decision making at retirement, and while an industry-wise initiative would be ideal, it’s unlikely to happen overnight.

    Schemes should be consistently reviewing their own comms to make sure they are clear and understandable. It can help to ask members what they think of communications they have received and for ideas on how to improve them.

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