Pensions - improving pensions
By David Marler, Managing Director,
CMS Financial Management Ltd
With final salary pension schemes being replaced by less expensive defined contribution schemes and employees soon to start taking pensions under the Government’s new auto-enrolment rules, improving income in retirement has become a concern for employees and employers alike.
Even more so given the rise in the official retirement age, which is likely to see staff carry on working well after 65 because they cannot afford to retire, with all the attendant long-term problems this will bring to the employment market.
But there are many options open to a company to improve the pension scheme that it offers its employees. A few simple steps can lead to bigger pension pots:
Reducing the annual charges the employee’s pension plan pays to the pension provider
Investing pension monies in line with an employee’s propensity of risk taking
Considering salary sacrifice to boost pension contributions, with no additional costs to either the employer or the employee
Shopping around for the best annuity available when retirement comes
Auto-enrolment, brought in to reduce reliance on state pension benefits, will require funding from both the employer and employee. It will offer employees a defined contribution pension scheme, as opposed to a defined benefit contribution scheme with the retirement risk taken away from the employer.
Traditionally the employer would manage the company’s pension assets and provide retirement benefits to previous employees, a situation that worked in the days of greater staff loyalty when it was not uncommon for someone to spend their entire working life with one company.
Now most employers make a fixed percentage contribution to their employees’ pension plans often matched by the staff themselves. But take up of the plans in some cases has been very poor with many preferring to rely on the state pension.
Indeed the average personal pension pot based on defined contribution at retirement age in the UK is between £30,000 and £50,000, giving an annual income of between just £1,500 and £2,500.
Workers could obtain far better value from defined contribution savings pots if they had access to advice and understood the risk-versus-reward element that is inherent in pension investments. Without full understanding and guidance, the funds could be placed at unnecessary risk when invested in the stock market.
Pensions are not a one-size-fits-all solution. A surprising number of schemes continue to offer a default fund for every employee that takes no account of the risk each person is willing to take. Moreover, the schemes often wait too long before moving the underlying investments into lower-risk assets such as bonds or cash. Improving investment choices alone can increase a retirement pot and enable each individual to invest where they are comfortable, targeting returns that suit them.
Encouraging workers to step up their own savings whenever they get a pay rise will also increase pension pots. Salary sacrifice in particular can boost each contribution made by an employee by up to 25.8%, which can provide a huge long term benefit to the employee.
Other measures open to employers include negotiating down aggressively annual management charges levied by fund providers, engaging with the pension providers to improve the marketing of the scheme to employees so that it is treated as a valued benefit rather than an additional cost each month, and shopping around for the best annuity at retirement instead of simply taking one offered by the fund manager. All of the above can provide a further boost to receiving greater pension income.
If employers arranged for financial advice to be made available to their employees, this could ensure that the right choices are made and that each pension fund built over many years meets each individual’s circumstances.
If you would like more details, or you would like us to visit you at your home or premises for an informal chat, contact CMS Financial Management Ltd on 01869 345588 or david.carter@cmsfinancialltd.co.uk.
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