If you read nothing else, read this …
- People are turning to Isas rather than pensions as a private savings vehicle.
- Easy payroll deduction is probably corporate Isas’ biggest attraction.
- A key decision is whether to offer a cash Isa or stocks-and-shares version.
- Take-up of corporate Isas has been slow but steady so far.
Case study: Isa is extra bonus at Allstate
Allstate is the largest IT employer in Northern Ireland, with more than 1,500 staff, to whom it pays a bonus each year. The company, which provides software development services and business process outsourcing to support its US parent’s global operations, offers a corporate Isa through Legal & General.
“We are continually looking to improve the rewards we offer,” says a company spokesman. “We decided to launch the Allstate Corporate Isa to help staff take advantage of a convenient way of saving, both in terms of regular savings from payroll and as a way of saving their bonus payments if they want to. About 10 staff currently use the WorkSaveIsa, with monthly contributions ranging from £50 to £250.”
Corporate Isas are gaining popularity as a tax-efficient savings vehicle, says John Greenwood
More and more people are opting for individual savings accounts (Isas) over pensions as a savings vehicle in their private lives, but this trend is yet to fully translate into Isa take-up as an employee benefit.
The popularity of Isas is undeniable. The total paid into plans rose from £35.7bn in 2007 to £43.9bn in 2009/10, while individuals’ contributions into pensions fell from £25.6bn to £22.9bn over the period, according to the Institute of Directors.
Yet two years after homebuilder Barratt became the first employer to introduce a corporate Isa, they are not yet mainstream. However, experts are seeing growing interest in corporate Isas, with easy payroll saving arguably their greatest attraction.
Emma Douglas, UK leader, workplace saving at Mercer, says: “Our research found employees thought the biggest benefit of corporate Isas was payroll deduction. They like the fact that the money is gone before they can spend it, making it easier to save.”
Deciding whether to offer a corporate Isa will depend on the profile of the workforce, says Charles Cotton, adviser, performance and reward, at the Chartered Institute of Personnel and Development. “For any HR professional considering putting in a corporate Isa, the question always has to be: how does it support the company’s strategic objectives?” he says. “Corporate Isas can be of help where an organisation is aiming to help staff save for retirement or to buy a property. But if you have a workforce on low or moderate incomes, it may not be that attractive.”
Robin Hames, head of technical, marketing and research at benefits consultancy Bluefin, says: “HR directors need to understand what they are trying to achieve with a corporate Isa. Is it to give an alternative way to save through payroll? Is it a landing destination for share scheme rollover? Is it driven by the belief that a pension is not attractive to staff, and if so, has that decision been reached before or after trying different methods for communicating the pension?”
A key decision when selecting a corporate Isa is whether to opt for a cash Isa or a stocks-and-shares version, or both. “We typically suggest people put in both, because the majority of people will want to use the cash option,” says Hames.
Scottish Widows, which offers a cash Isa and a stocks-and-shares Isa, says 90% of people opt for the cash version, and only 10% go for stocks-and-shares. But staff wanting to roll over sharesave will need a stocks-and-shares Isa to be able do so.
Andy Taylor, senior proposition manager, workplace savings platform at Scottish Widows, says: “These figures show most employees are more comfortable with the security of a cash Isa.”
That said, some providers, including Legal & General and Fidelity, may only offer a stocks-and-shares Isa, so employers wanting to run a corporate Isa alongside their pension may have their options dictated by their choice of provider.
Cotton argues that opting for a corporate Isa could detract from other benefits. “If you have a share scheme and a corporate Isa, both trying to encourage long-term saving, one may divert money away from the other,” he says.
Providers say corporate Isas complement share schemes rather than compete with them, with the Isa creating a natural home for share scheme holdings. In some cases, corporate Isas can save employees more than £3,000 in tax (see box below).
Also, because they typically cost the employer nothing, they represent an economic way to offer something new, say providers. However, HR professionals are entitled to ask exactly what value employees derive from Isas.
Mercer’s Douglas says: “You will not necessarily get the best deal on the market, but will be near to it. It is not like pensions, where you get a better deal by being in a big scheme than you would individually, but you can expect a decent deal.”
Investment funds bought through stocks-and-shares corporate Isas are likely to be about as cheap as the best deals savvy financial consumers could get by shopping around, but without the legwork.
Cash Isa rates are likely to be good and sustainably so, but never the absolute best. Scottish Widows, for example, offers corporate Isa customers a first-year bonus of 0.2% on top of its regular cash Isa rate of 2.5%. This cannot compete with the very best Isa rates, currently 3.5%, but these top rates fall below 1% once the initial bonus period is over. Corporate Isas aim to give a decent rate over a sustained period.
The deals employers get on corporate Isas will often depend on the size of the pension running alongside the plan. But so far there is no evidence of competition between employers as to who is getting the best deal. Douglas adds: “Isa pricing is in its infancy and we do not yet have a proper benchmark for what is good value.”
Take-up of corporate Isas has been slow but steady so far. Fidelity has put in place 14 corporate Isa schemes to date, and says the number of employees using them varies from 5% to 10%, with an average monthly sum saved of £300.
Rob Fisher, head of marketing, DC and workplace savings at Fidelity, says: “We find the people saving in our corporate Isas are younger than those in pensions. Our average pension saver is in his or her 40s, whereas most Isa savers are in their 30s.
“Corporate Isas can be used to accommodate high-earning executives caught by the new pension contribution allowances, but they can also help younger employees who do not like the idea of saving in a pension.”
Employers are entitled to communicate the benefits of a corporate Isa and compare it with a pension, but in future they must be careful not to fall foul of rules prohibiting them from inducing employees to opt out of pensions after they have been automatically enrolled.
Rolling shares into an Isa can save tax
- Corporate Isas can be a tax-efficient tool for employers with save-as-you-earn schemes set to mature with big gains. Shares bought under SAYE can be moved into the Isa on an in specie basis, which means without creating a disposal for corporate tax purposes.
- Higher-rate taxpayers with gains above the annual capital gains tax allowance of £10,600 can save £3,158.40 by making an in specie transfer of shares into an Isa, while basic-rate taxpayers can save £2,030.40. Transfers must be made within 90 days of exercising the option to benefit.
- This is what Legal & General expects many of its own staff to do when its 2009 share scheme matures in June. Staff have the option of buying shares at 35.6p, and with the firm’s share price around £1.20, those who paid in the maximum £250 a month for three years could make £30,000, a capital gain of over £21,000. Using the annual CGT allowance and the Isa enables staff to avoid CGT on £21,880 of gains.
Read more articles from the Workplace Savings Quarterly