What employers could do to make employees take an interest in pensions.

 

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Pensions have not been the most engaging or exciting of topics in the past, despite often being the second most valuable benefit after a salary that an employer provides for their staff. But the recent pension changes, giving individuals the power to decide how to manage their retirement income, along with Auto Enrolment (AE) bringing more people into pensions for the first time, have put the subject back on the map. However, the truth remains that many need to save more, and quickly.

Significant numbers of people have workplace pensions, so if they are going to be persuaded to save more for retirement, employers are often the people they trust. But what can be done to encourage greater engagement among staff, and greater willingness to pay in more than the minimum?

WEALTH at work have educated tens of thousands of employees about what they will be able to afford in their retirement, the benefits of paying into a pension, and the value of contributing as much and as early as possible.

Some of this information may be available on company websites or benefits portals, but many people have an ostrich mentality when it comes to pensions, preferring to bury their head in the sand, so having someone to actually speak to about pensions, and explain how it is possible to have a decent income in retirement, is far more engaging.  In fact, some of the UK’s leading employers use classroom based seminars to educate their employees about pensions. Once clearly explained to someone, along with the consequences for them personally, there are few people who do not take an interest.

Individuals need to know how much they will actually need in retirement.  One way of doing this is through the ‘balance sheet of retirement’. Someone with a salary of £30k might think they will be significantly worse off with a retirement income of £15k, however many pensioners have no national insurance (NI) or pension contributions to make, less income tax, often mortgages are paid off and perhaps children are financially independent, meaning that some may actually be better off.

Helping individuals understand what will happen to expenditure for day-to-day costs when they retire, and then comparing this to different pension incomes, using clear language, avoiding jargon, and with simple examples, really brings to life what they will need.

Explaining how much needs to be saved to provide an income in retirement is also a real eye opener. Many are surprised to realise that to receive a pension of around £16k pa, rising in line with inflation, with a spouse’s pension, and a 25% tax free lump sum, could require a Defined Contribution (DC) pot in the region of £600k.

It can be shocking to see just how little your pension savings will actually cover, especially when taking life expectancy and inflation into consideration. However, if an individual can afford to increase their contributions, and be reassured that a good retirement is attainable if they save more, most will do so.

Final salary or Defined Benefit (DB) scheme members can often be persuaded to contribute more when AVCs (additional voluntary contributions) are properly explained. Generous schemes may give the chance to buy additional years of pension service to boost savings, but this can be very expensive. More typical is a DC type arrangement which allows someone to take up to 100% as tax free cash, boosting the guaranteed income element of the DB scheme.  In addition, as well as the usual tax relief, if it is arranged as a salary sacrifice there is a 12% NI boost, so the contribution gets a tax relief of 32% for a basic rate taxpayer. There are not many people that would not be tempted to contribute more with that type of uplift.

Some people are better off putting as much of their salary as they can afford into AVCs, and then supplementing their day to day living costs with other savings or by selling shares they have at work, because of the tax benefits.

Even those not with DB schemes are impressed at the tax relief especially when combined with an explanation of the allowances available, and how to use share incentive plans to boost pension savings.

While many in the past may have been put off by having to buy an annuity, being able to take benefits at age 55 as a cash lump sum, along with the ability to pass it on to beneficiaries free of tax, is a game changer. It means that employees in their mid 40’s with any spare income really should consider boosting their pension savings.

The bottom line is that pensions do not have to be complicated or unaffordable, and most will understand and want to engage if the benefits and personal consequences are communicated clearly. It really is too important an issue not to.

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