Pensions insight
Could new salary sacrifice regulations bridge the pensions savings gap? Yes, argues Darren Hedgley, associate director at Punter Southall Aspire iPads out, pensions in
B usinesses and government have for a long time faced the challenge of getting people interested in pensions, and saving enough for the retirement lifestyle they expect. Last September, research from PwC (http://bit.ly/1L3BA0R) showed that while people may want a retirement income of £22,200 per year, without greater incentives to save, this is unrealistic. Many will face a £4,000 per year shortfall between their pension savings and desired retirement income. PwC also found that six out of ten people are put off saving into a pension because they don’t understand the pension system – a figure that is even higher for women and younger workers. Another report – The Cost of Tomorrow – from the Tilney Group (http://bit. ly/2l7GTaJ) suggests the vast majority of over-45-year-olds believe they will either improve (36%) or maintain (48%) living standards in retirement. Yet evidence shows they are underestimating their retirement budget by almost £100,000. But with regulations around salary sacrifice changing in April, could this be an opportunity for employers to get employees focused on the benefits of workplace savings and bridge the pension savings gap? One of the biggest changes to salary sacrifice will be that employees will no longer have access to the ‘sexier’ benefits, such as discounted phones and iPads, and instead, schemes will focus on pensions and childcare. But these changes could be a significant force for good in the future retirement planning for this generation and the next. By clearing away some of the ‘benefits clutter’ available to employees, they will be able to concentrate on things that will provide longer term benefits such as becoming healthier by embracing a
cycle2work scheme or increasing their pension savings to build a bigger retirement pot. Up until the last Autumn Statement, many employees had understandably been lured by the glamour of choosing an iPad or the latest Samsung Galaxy over the prospect of retirement savings. But now they may have less of a dilemma about where to allocate their net income. Looking more closely at the iPad v pension dilemma, there are clear pros and cons of each for employees. ● Cost – An iPad will cost £600 per year, whereas a pension will cost up to 5% of earnings until retirement (current automatic enrolment minimum from April 2019). The iPad wins. ● Employer assistance – The government has made it compulsory for employers to pay into employees’ pension funds thanks to automatic enrolment. The pension wins. ● Payment period – It takes just twelve months to pay for an iPad, as opposed to forty plus years for the pension. The iPad wins. ● Instant gratification rating – Obviously the iPad wins hands down here. For younger employees, pensions are in the very distant future. ● Salary sacrifice benefit – A salary sacrifice iPad won’t be available after April 2017, whereas the pension will still be free of both income tax and National Insurance free. The pension wins. ● Shelf life/longevity – The iPad will last three to four years approximately, before becoming relatively obsolete, whereas the pension will last a retirement lifetime. ● Cool rating – iPads are cool, pensions aren’t. ● Delivery of the benefit – iPads come in a nice box. But pensions have also had a makeover in recent years and there are
several options now available for people from the age of 55. They can choose to take a 25% cash lump sum (tax free) and could take remaining sums intermittently or monthly, allowing complete flexibility. The pension wins. ● Future financial benefits – Zilch for the iPad. Very promising for pensions with minimum combined employee contributions set to rise over the next few years to 8% and hopefully further after 2020. One of the main benefits of the changes for businesses is that they will have a chance to engage employees in financial education and encourage them to think more about pensions. But what could employers be doing to prepare for these changes now? Firstly, they could review their current salary sacrifice arrangements to ensure they understand exactly how it works and check it is appropriate for their employees. They may need to design a new scheme and make sure it is managed properly, ensuring any risks are identified and mitigated from both an employer and employee perspective. Then they need to promote the scheme and see it as a real opportunity to inform and educate employees about how salary sacrifice and saving into pensions will significantly improve the kind of retirement lifestyle they can expect. Whilst many younger employees who had previously used salary sacrifice to purchase smartphones or tablets may not be overly keen to switch to saving towards their pension, explaining the benefits could change their opinion, as well as improve employee engagement. It’s not sexy and there’s no instant gratification with pensions as there is with iPads, but it could just be the best decision employees make for their future. n
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Issue 29 | April 2017
| Professional in Payroll, Pensions and Reward |
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