This article is brought to you by JPMorgan INVEST
JPMorgan INVEST, part of the JPMorgan Asset Management group of companies, is a leading specialist provider of financial education in the workplace. David Cassidy, chief executive officer, JPMorgan INVEST comments
On reflection it seems incredible, but the provision of occupational pensions are not regulated by the Financial Services and Markets Act 2000. Neither is much advice provided in relation to them. As a result, the regulatory safeguards regarding the suitability of financial products available ‘on the High Street’ via financial advisers are not in place when it comes to the provision of what is, for many people, their most important savings vehicle. If the principles of ‘suitability’ and ‘treating customers fairly’ were applied to investments offered to employees by dint of their employment there is increasing evidence to demonstrate that the way they are offered would fall woefully short of the standards usually required.
The lack of education in the workplace around this most fundamental of benefits means that many employees could be, unwittingly, making the wrong choices both at the outset and, later, at the point of retirement. Let’s just examine those two key times, starting with how and when we join a pension scheme.
Traditional wisdom dictated that it was the right thing, if affordable, to put as much into a pension as early as possible. However, changes brought about by pensions simplification legislation challenge this traditional way of thinking. It is now possible to link share schemes such as a share incentive plan with pensions. So, for many employees, particularly those with a relatively modest savings capacity, the better option would be to join the share scheme first and move the money into pensions later. The benefits are two-fold. Firstly the employee has a greater degree of control over their savings as it is not immediately ‘committed’ to the pensions environment. Secondly, the effect of ‘double tax relief’ can significantly enhance the ultimate pension pot.
At the other end of the decision timeline, at retirement, employees in defined contribution schemes are able to purchase an annuity but is this right for an employee’s circumstances? It is now possible, again under pensions simplification rules, to maintain a higher degree of control over pension assets by taking income via an unsecured pension and, later, as an alternatively secured pension. Although the pension funds may still be invested in the market and therefore there is a potential risk to both capital and income unless the funds are properly managed, this will allow the individual flexibility – flexibility to control income in relation to changing personal circumstances and flexibility to take advantage of changes in the progressing economic environment. This flexibility is not present with annuities. Furthermore, with a properly maintained strategy, phasing the income withdrawals can enhance the amount of capital which can be taken from the scheme tax free.
Employers need to make their employees aware of these fantastic new opportunities.
How will they go about doing it? Brochures, emails and intranet are among the most favoured options. But, experience shows that this type of information is either not read or, worse, misunderstood. As a result people either don’t act or don’t act in the way which is in their best interests. Employees need a greater degree of understanding before they can make an informed choice.
So the answer has to be financial education in the workplace.
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.