Our range of Pathways services are designed to tackle all the member advice issues that could arise during the decumulation stage of retirement planning.
Pension decumulation is the process of converting pension savings to retirement income (see diagram below). This process is mapped out for DB members unless they transfer to a DC scheme. For all DC members, or those with both DB and DC benefits, we believe the decumulation process must start approximately 5 years before a retiree takes pension benefits. This will ensure the member arrives at the point of taking benefits holding the correct assets and in the best position to achieve a good outcome throughout retirement.
We refer to this pre-retirement period as ‘transition planning’ and because members will still belong to the workplace pension during this stage, it is a key area of focus for employers and trustees to tackle and deliver the necessary support.
Historically, over 80% of retirees bought annuities and lifestyle and target date strategies were reasonably effective as transition planning strategies to meet the majority of members needs. Many DC members are still in these strategies and with so few now buying an annuity, many will be heading in the wrong direction, and need help.
Some schemes have changed default strategies and/or added other glidepath options but this is not the solution. Members still need more support to correctly identify the best strategy for them, which could be a combination approach, and ‘One size fits all’ solutions really do not work for people looking to use income drawdown because everybody’s personal circumstances, priorities and needs for cash and income will be different in retirement – ideally, members need a personalised glidepath to reflect that.
This is a complex area to provide help for your employees because so many factors affect the correct choice of retirement strategy and hence transition strategy; personal circumstances, other pensions, other assets and debt to name just a few. Much of this information simply isn't known to employers so providing meaningful guidance becomes extremely difficult. A more personalised approach is needed and this is where we believe our Pathways proposition can help.
Below is an example of a good decumulation process. It should be remembered that pension decumulation is an ongoing process and should never be viewed as a one-off event.