The new pensions freedoms taking effect next month will have a significant impact on individuals. But, as we explain, it is inevitable that employers will be affected too.
The new pensions freedoms in outline
From 6 April, the new rules will give individuals over the age of 55 greater freedom over how they access their pension savings. In particular, these individuals will be able to draw an income from their fund at any time they want, or “cash-in” their entire pension pot.
The new flexibilities will only apply to defined contribution (DC) pension savings (within both occupational and personal pension schemes and arrangements). Anyone with a defined benefit (final salary) pension wanting to take advantage of the new freedoms will have to transfer their benefits from their final salary scheme to a DC arrangement. Such transfer option is not available to members of unfunded public sector schemes (for example the NHS Pension Scheme).
Since the new flexibilities are optional, not all DC schemes or arrangements will choose to offer them. Legislation is therefore being amended to allow individuals to transfer between DC arrangements right up to the point of retirement if their existing scheme does not offer the new flexible access choices.
The Government’s guidance guarantee
The Government recognises that the average individual has very little understanding about pensions, and so has legislated to give individuals free guidance as they approach retirement through its “Pension wise” service. This will be provided through the Citizens Advice Bureau, The Pensions Advisory Service and the Pensions wise website.
The Pensions wise service delivers only general guidance and not detailed personalised advice. How far this service will actually go in providing better retirement outcomes for individuals is still under debate.
A rise in employer’s pensions contributions?
The new pensions rules come hard on the heels of automatic enrolment, which has already raised pensions awareness, with over 5 million workers now saving into a workplace pension scheme (and this figure is set to increase once all employers have reached their staging date). It is likely that the new flexibilities will create even more interest in saving for retirement going forwards.
As a result, this may mean fewer opt-outs for automatic enrolment purposes or individuals increasing their pensions contributions into their workplace scheme. This will push up pension payroll costs for employers, particularly for those who match employee contributions up to a certain rate. It should also be noted that the minimum rate of employer contributions under automatic enrolment is set to increase from 1 per cent to 3 per cent in 2018.
More pressure to allow flexible working for older workers?
While flexible working and late retirement are not new concepts for employers, they are likely to be more common as a result of the pensions changes from April due to two contrasting effects of the new access options.
Firstly, many workers (particularly those with lower overall pension savings) may be tempted to cash in their pensions savings once they reach the age of 55 in order to pay off existing debts or spend their savings on lifestyle improvements, leaving no income for their retirement. This may mean that they need to work beyond the point their employer might have expected them to retire.
Secondly, those workers with higher levels of pension savings may use these, through the new pensions access options, to fund partial retirement or flexible working.
So employers may be faced with an ageing workforce in respect of those who cannot afford to retire, as well as more flexible working requests for those who can afford not to work full-time. These requests could either come through informal channels, or via the statutory right to request scheme which has been available to all employees with at least six months’ service since July last year.
Employers will need to think carefully about how they should be communicating information about the new pensions flexibilities (and whether they will be offered through the employer’s workplace pension scheme) to their workforce.
At the very least, employers should be pointing their workforce in the direction of Pensions wise, but should also consider whether to provide their employees with financial education to help their staff achieve the best possible outcomes from their pensions savings. It is highly likely that employees will turn to their employers in the first instance for information and guidance on their options for retirement.