Step 7 - Retirement

The final stage in our Seven Steps to Financial Wellness is best viewed as a long walk rather than a single step. Saving for retirement is a lifelong financial project that runs in the background behind the other financial activities such as buying property that we’ve discussed in this series.

However, employees need check-ups throughout their career to make sure that their retirement plans are on track. They’ll also need financial education and advice when it comes to deciding how to use their pension savings to fund life after work.

Start early

Saving small, regular amounts over a very long period of time is the best approach to building a retirement ‘pot’. The most obvious way to do this is through a pension, and auto-enrolment means that every employee should now have access to a workplace scheme including employer contributions.

While the minimum contributions required by law won’t fund a luxury lifestyle, over time they will help everyone to build a more comfortable standard of living in retirement. Encouraging employees to make pension payments above the auto-enrolment minimum and providing matching employer contributions will make a significant difference to the size of an individual’s pension pot over time and to their financial wellbeing in retirement.

However, saving into a pension can sometimes be a hard-sell to younger employees. It’s difficult for an employee in their 20s or 30s to imagine their late-60s ‘future self’. Some people will be influenced by relatives who have either thrived or struggled in retirement, but many of us will have no frame of reference for what life after work will look or feel like.

Employees also have present-day financial needs to consider. Getting onto the housing ladder, supporting a young family or paying off debts might feel like more immediate priorities than saving for a mysterious ‘future self’. Financial education can play a significant part in helping employees understand the importance of long-term retirement savings and why they should make it a part of their plans from the day they start work.

Check progress

While a pension is the most obvious way of saving for retirement, there are also other options to consider.

Employees aged under 40 can open a Lifetime ISA - a tax-efficient way of saving for retirement or to buy a first home. Traditional cash or stocks-and-shares ISAs are suitable for employees of any age and can be a useful addition for higher earning employees who have reached the Lifetime Allowance or Annual Allowance (i.e. the maximum amount they can pay into a pension tax-efficiently in their lifetime or in a single year).

Some employees might also consider other assets such as property or future inheritances as part of their retirement savings but are high-risk. You still need somewhere to live when you retire, and a potential inheritance can quickly evaporate if a parent or other relative requires costly care in their final years.

Keeping track of different retirement savings pots and making sure that they will add up to a meaningful income in retirement, isn’t straightforward. Offering employees a ‘mid-life MOT’ in their 40’s can be a useful checkpoint to help individuals understand whether they are on track to meet their retirement aspirations and amend their plans if needed. By your forties, that ‘future self’ starts to feel a little more real!

Get retirement-ready

Since 2015, everyone over the age of 55 with a defined contribution (DC) pension has been able to use their pension savings for any combination of cash withdrawal, investment through income drawdown, or buying an annuity.

Members of defined benefit (DB) schemes cannot access these options– but can opt to transfer their pension out of a DB scheme and into a DC arrangement. This means an employee loses life-long, regular pension payments and must instead manage their retirement savings on their own.

Deciding how to use DC pension savings or whether to transfer out of a DB scheme are major, often irreversible, decisions. Good quality financial advice is vital, as financial choices made at retirement will affect employees’ financial wellness for the rest of their lives.
As we saw in Step Six, tax is also a major consideration when it comes to accessing retirement savings. Financial advice can save employees from wasting their pension savings on unexpected, avoidable tax bills.

Walking out of the workplace for the last time might be one small physical step, but it’s a giant leap in financial wellness terms. Employers have an enormous part to play in making sure that employees feel in control financially when they retire – ready for the new journey of a lifetime.

Retirement is our final step in Close Brothers’ Seven Steps to Financial Wellness series.

If you would like to know more about financial education in the workplace please email financialeducation@closebrothers.com