PENSIONS INSIGHT
Achieving good pension outcomes
In a series of articles, Alan Morahan, managing director, DC Consulting, Punter Southall Aspire, looks at how the employers of seven fictional friends could help them achieve their retirement dreams
A new report from Prudential (http:// bit.ly/2sWVTIM) published in June revealed that while British workers expect to retire well before state pension age, they may be disappointed as one in ten won’t begin saving for retirement until they are 46 years old. This follows research (http://on.ft.com/2dViYFz) last year which found workers in the United Kingdom are under-saving for retirement by up to £11billion a year, and only 16% are saving enough to maintain their current standard of living when they retire. To achieve people’s retirement dreams, pension schemes have quite a task. They must deal with numerous challenges; most importantly, providing good member outcomes. However, pension scheme members vary hugely, so how can schemes meet all the requirements of all their members and what can employers do to help? To demonstrate the point, let’s imagine a group of seven friends working in various roles and look at their different situations to see if they could be assisted by their employer to make the best financial decisions about their retirement. The first of friends are Doc and Grumpy. Doc has accumulated significant benefits in a National Health Service (NHS) pension scheme and is now working in a private medical centre. He’s heard his colleagues talking about the lifetime allowance (the maximum value of benefits that can be taken from pension schemes without being subject to a tax charge) and assumes he might be affected. Doc needs access to information and education about this and potentially to be allowed some flexibility regarding pension contributions. Doc needs to know that the lifetime allowance is £1million and that the benefits accrued in the NHS scheme could eat into
a sizable chunk of this. For defined benefit or final salary
He is highly suspicious of companies that offer pensions and believes the only reason his employer is offering him one is because there’s something in it for them. He is especially concerned about salary sacrifice. There is a big communication role Grumpy’s employer needs to play. They must help him understand the three main benefits of pensions: getting money from your employer, money from the government and eventual access to a portion of it, without any tax to pay. Grumpy is not alone in his jaded perception of pensions. There has been a mountain of cautionary tales about pensions going wrong, further exacerbated by a lack of understanding, not helped by the industry’s opaque and ever-changing rules. Grumpy’s employer wants him to value the benefit they are providing. Unlike many of their competitors, they are contributing more than statutory minima into his pension pot and they also enable him to make his contributions efficiently via salary sacrifice. A simple communications programme would achieve a significant increase in Grumpy’s understanding and engagement. Short, tailored messages delivered regularly in a format he appreciates might soften some of Grumpy’s objections. Providing planning tools that enable Grumpy to see the combined worth of his numerous schemes would also allow him to measure their value and even compare this to the possible equity tied up in his family home. n Most employers will have workers at various stages in their pension journey. Doc and Grumpy’s situations highlight how important it is to tailor advice and financial educational programmes accordingly.
schemes like the NHS scheme, the pension is converted to a notional capital value by multiplying it by a factor of twenty, and adding the value of any tax-free cash taken. As a high earner, Doc may also be impacted by the tapered annual allowance (TAA). If he isn’t aware of this, he could be heading for a hefty tax bill in 2018. ...most importantly, providing good member outcomes The annual allowance is the total amount of contributions that can be paid into pensions during a tax year without incurring a tax charge. Contributions of up to 100% of earnings can receive tax relief, subject to the annual allowance, which is normally £40,000. Any amount contributed above the annual allowance is added to an individual’s taxable income and taxed at their marginal rate. The variation which came into play in April 2016 was the TAA. This measure restricts pension tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with an adjusted income of over £150,000 and a threshold income over £110,000. Doc’s employer could help here by considering what strategy it has for people affected by the lifetime allowance and TAA. It could also introduce a financial education programme to ensure people have the right information and knowledge so they can make good decisions and aren’t caught out. Grumpy, Doc’s friend, has read articles about people losing all their pension savings and wants to avoid a similar trap.
| Professional in Payroll, Pensions and Reward | September 2017 | Issue 33 48
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