3873This article is brought to you by our sponsor JPMorgan Invest.
Jonathan Watts-Lay, director at JPMorgan INVEST, says that without financial education there is a good chance that employees will miss out on a whole host of money saving opportunities
There has been much media interest over closures of defined benefit (DB) pension schemes, as their replacement, defined contribution (DC) schemes, have a lower perceived value.
However, there are savings vehicles which can be set up to run alongside, offering flexibility and enhanced value. Such a scheme combining share schemes and pensions was called for in 2004 by The Employer Task Force on Pensions.
We believe the provision of financial education at work provides the answer, from understanding how to link company share schemes with pensions to providing employees with all their retirement options. Employers should reveal the benefits of using share schemes to increase pensions.
For example, if taking advantage of a share incentive plan (Sip) employees may buy shares from pre-tax income, giving them an effective ‘discount’ because of tax and national insurance (NI) savings.
Unlike a contribution directly into pension, which attracts income tax relief, contributions made via the Sip attract two ‘helpings’ of income tax relief on the same initial outlay.
This has significant advantages as it creates a larger fund from the effect of ‘double tax relief’, and offers greater flexibility in the years before the capital is committed to pension, which is attractive for people a long way off retirement.
Finally the Sip offers tax effectiveness, delaying the final commitment to pension. If employees are a basic rate taxpayer they will attract basic tax relief. Delaying the contribution may mean that the same initial outlay attracts higher rate relief as a result of salary increases through career progression.
Most companies are not in a position to allow transfer of stock from their share schemes directly into pension as they don’t want to take on the additional administrative burden, cost and restrictions on levels of ‘self-held’ stock.
Since pensions simplification in 2006, pensions can run concurrently. This allows employers to maintain the existing company scheme while offering a self-invested personal pension (SIPP) to run alongside it, known as a workplace SIPP.
It allows employees to link share schemes and pensions, but also allows the transfer of stock. Regulations allow for tax relief to be claimed on contributions amounting to the lower of 100% of earnings (or equivalent) and £225,000 this tax year. However, many occupational schemes limit their employees to a level below this.
Employees need to understand all this to take advantage of the opportunity and only through financial education can this be achieved.
Employees also need guidance to consider their options as they reach retirement. This could make a significant difference to their financial wellbeing as some are irreversible, others not. The Pensions Regulator stresses that members of DC schemes need to be made aware of all options at retirement.
These include drawing retirement income by, for example, taking an annuity or unsecured pension (USP) up to age 75 years, and using a combination of an annuity and USP, or taking an alternatively secured pension (ASP) post age 75 years. An employee can even take partial retirement and work part-time supplementing income in any of these ways.
But the only way that employees are going to understand these exciting opportunities is through a financial education programme. Employees will benefit financially while the employer engenders a greater degree of loyalty from their staff.
The views and opinions in this article are those of our sponsor, JPMorgan Invest, and do not necessarily reflect those of www.employeebenefits.co.uk.