The retirement planning paradox

For professional clients only.

Everyone loves a good plan for parts of their life. Going on holiday? Flights and accommodation will be booked months in advance. Purchasing a new house? A move-in date will be worked to the week. Getting married? That's a year-long lead time. So it always surprises me that when it comes to planning for retirement, one of the biggest life events, these plans typically disappear.

Since the introduction of auto-enrolment in 2012, the proportion of UK employees enrolled in a pension scheme has increased significantly. 79% of employees are active members of a pension scheme in 2021, up from 46% in 2012. Active members in the defined contribution space are the main driver, rising from 17% of employees in 2012 to 50% of employees in 2021 (1). There are more employees than ever approaching retirement with defined contribution benefits, and these benefits are increasingly important for their retirement. With these benefits being more volatile than defined benefit counterparts, and with the economic and geopolitical environment we find ourselves in, there is a greater need for employees to plan for their retirement.

So why are employees generally not planning for their retirement? Below are some (not all) of the reasons for this:

• Perception in pension provision - DB schemes historically were set up to provide a suitable income for life on retirement. As we move to a DC-dominated landscape, the perception hasn't changed - 60% of employees who contribute the minimum pension contributions are confident they will have enough income for the standard of living they want, whereas the numbers tell a different story (2). 

• Increased flexibility - In the days of DB pensions, when you retire was the main choice you faced. Now there are many more decisions to make; how do you access your savings, how do you consolidate your pensions, and what stream of income is needed for your retirement. 40% of employees over age 60 still don't know how they plan to access their pension (3). More choice is a good thing, too much choice, maybe not so much.

• Current economic climates - It's no surprise that, when times are hard, people often contribute less into their pension. In one of our recent surveys, 22% of employees have either stopped contributing or reduced their contributions in the last 12 months as a result of current economic pressures (4). It is harder to plan for the future when people need to think about the present.

So what can employers and trustees do to help their members who are approaching retirement? Supporting them to plan for their retirement is key and, based on our experiences, there are a few suggestions we can offer:

• Retirement plans need to be holistic - Members are likely to have many forms of savings for their retirement, through different pensions (DB and DC), personal wealth, state pension and property. Similarly, members may view their retirement prospects combined with their partners/spouses; the current workplace pension system largely has a focus on the individual.

• Financial confidence takes time - You wouldn’t run a marathon without any training, and the same should apply to retirement planning. Gradually increasing financial confidence long before retirement will allow members to make more effective decisions on retirement, as opposed to just introducing these concepts 3-6 months before retirement.

• Support is most effective through the employer / trustee -Provision of support through the workplace can provide a ‘safe-space’ for members, as they have confidence in the employer / trustee on the service provided and are encouraged to make the most of the offering. This has led to increasing demand from employees for their employers to offer financial support.

• Plans can change - Member circumstances will change over time, whether due to personal circumstances or wider external pressures. Regular touch points are encouraged to ensure a retirement plan can adapt to the individual’s circumstances.

The path of financial advice is well-trodden, however many people don’t have an immediate need for regulated financial advice, which is where financial coaching can fill the gap in a cost effective way. Financial coaching is an area of growing importance and one that Hymans Robertson Personal Wealth is leading on with our clients to help members make better financial decisions.

This is a very important area for future retirees and I’d be happy to have a conversation with anyone to discuss further, please don't hesitate to get in touch. 

Hymans Robertson Personal Wealth’s Financial Coaching service is a guidance only service which is not regulated by the Financial Conduct Authority.

¹ Employee workplace pensions in the UK: 2021 provisional and 2020 final results

² Pension Adequacy: The Pension Saver's Perspective prepared by Ignition House

³ Institute for Fiscal Studies - IFS Report R261 How important are defined contribution pensions for financing retirement?

⁴ Hymans Robertson Survey as at Dec 2022

Disclaimer

This communication has been compiled by Hymans Robertson LLP® (HR) as a general information summary and is based on its understanding of events as at the date of publication, which may be subject to change. It is not to be relied upon for investment or financial decisions and is not a substitute for professional advice (including for legal, investment or tax advice) on specific circumstances.

HR accepts no liability for errors or omissions or reliance on any statement or opinion. Where we have relied upon data provided by third parties, reasonable care has been taken to assess its accuracy however we provide no guarantee and accept no liability in respect of any errors made by any third party.

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