Employees must take advantage of flexibility in pension options

1st February 2010

With the demise of defined benefit (DB) pension schemes, the risk of ensuring that savings are likely to meet future income requirements now lies firmly with employees. Employees need to manage contribution levels, their ongoing investment strategy, and be aware of investment returns and growth.

However whilst these are key factors in any defined contribution type pension arrangement there is a more significant consideration in helping employees secure their long term financial well being, that is flexibility.

An employee may contribute to a pension via payroll deductions. However additional contribution flexibility may support them in contributing greater value, for example:

• Does the existing pension arrangement easily facilitate one off contributions e.g. cash bonus?
• Are pension contributions made via salary sacrifice with potential national insurance savings?
• If employees participate in share schemes does the pension facilitate in specie transfers from HM Revenue and Customs approved shares schemes with potential income tax savings?

In most cases employees will purchase an annuity to provide them with an income in retirement. However additional income flexibility supported by information and education may ultimately ensure employees achieve a greater income in retirement, for example:

• Are employees made aware of the retirement income options available to them, including unsecured pension?
• Does the existing pension arrangement support such alternatives?
• Do employees have access to tools and advice that will help them determine the most competitive and appropriate income in retirement?

Increasingly companies are considering the range of savings vehicles that are made available to employees. Whilst a pension represents the core of an individual’s retirement savings strategy and will most likely continue to do so other opportunities may provide employees with savings flexibility and indeed encourage them to develop the savings habit:

• Would access to an individual savings account (ISA) with a subscription limit of £10,200 help those seeking to save tax efficiently, yet retain access?
• Should HM Revenue and Customs approved share schemes become an integral part of an employee’s savings providing the importance of investment diversification is highlighted?
• Will a deposit account with a preferential rate of interest support those with a shorter investment time horizon e.g. saving for a deposit to purchase property?

Delivering the flexibility referred to above requires two main ingredients, the capability to deliver the various elements and the need to engage and educate employees to ensure opportunities are maximised.

Simply providing access to additional flexibility will not be sufficient in itself; employees need to understand the value of flexibility and how it will assist them in securing their long term financial well being. Employees need to take ownership to manage the risk of ensuring savings are likely to meet future income requirements – a risk that is now theirs to manage.