Charles Gillespie: Auto-enrolment is not the end

This Workplace Savings Industry Forum is supplied by Close Brothers:


With auto-enrolment just about upon us, discussions around saving in the workplace have generally been focused on the sponsoring employer’s pension scheme.

While we cannot underestimate the importance of saving for our retirement, it is also important that employees are in a position to manage and control all of their financial needs, not only at their selected retirement age but also throughout their lifetime.

Of course, what constitutes short term for one individual may be long term for another, based on their age, therefore their financial needs and objectives will also differ, whether it be, for example, saving for a holiday, children’s education, house purchase or retirement.

Both pensions and Isas (individual savings accounts)benefit from favourable tax treatment and are invested in tax-efficient environments that grow free of tax on investment income (except for tax deducted from UK dividends) and capital gains.

Investment strategy

Apart from the difference in investment strategy, the other main differences between pensions and Isas are accessibility, the tax treatment on encashment and the tax treatment on any personal contributions. Employees cannot access a pension fund until they are aged 55, but an Isa has no age restrictions.

In respect of drawing benefits from each, there is no personal liability to income tax or capital gains tax on encashment of an Isa, however any income paid from a pension is paid net of income tax based on the individual’s highest marginal rate (although they can generally draw 25% of the fund as a tax-free lump sum).

On the other hand, personal pension contributions receive tax relief at an individual’s highest marginal rate, but Isa contributions do not receive any tax relief.

Most employees would not be aware of these facts because they do not have access to an independent financial adviser to help them understand the different products and indentify which is best for them in an ever-changing economic landscape.

Financial education

Employees often look to their employers to help them understand their pensions, investments and related taxes, especially if the employer is seen as the provider/conduit of these benefits. Organisations are now realising that in an environment where both the range and complexity of pension and tax choices are increasing, an independent financial education programme is an essential partner to their staff benefits package.

Auto-enrolment has prompted many businesses to look carefully at their pension offering, yet how many of their staff are aware of what it means to them? The administrative solutions we can offer to our clients assist with the implementation and management of auto-enrolment, but what do their staff understand about the pension and retirement options open to them?

Financial education guides employees in the right direction and, when successful, inspires them to take positive action. It can take many forms dependent on an organisation’s objectives, benefits structure and staff demographic. Whatever the strategy, financial education benefits employers as well as employees. It can highlight the full value of their benefits, increase engagement and provides a real differentiator against competitors.

Charles Gillespie is head of corporate advice at Close Brothers

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