Covid-19 (Coronavirus) and lockdown have threatened livelihoods across all age groups. Constraints on current income may lead workers to defer financial planning decisions.
They may be disinclined to invest following recent falls in markets. This reluctance may be most marked with pensions, which generally cannot be accessed until age 55.
However, except in cases of significant financial hardship, pensions remain an attractive form of investment. Employees may contribute towards retirement benefits within the annual allowance, which for most people is £40,000. Their pension scheme will usually be credited with the grossed up amount of those contributions, including income tax on the contributions at the employee’s top marginal rate of income tax.
Employers are obliged to automatically enrol employees who earn £10,000 per year or more into a qualifying pension scheme, into which contributions of at least 8% of their qualifying earnings between, currently, £6,240 and £50,000 per year must be paid, with at least 3% of such qualifying earnings being contributed by the employer.
Income and gains on contributions, while invested within the pension scheme, are largely tax free. When employees take their benefits on or after age 55, they may receive a tax-free lump sum of up to broadly 25% of their fund and draw the remainder as income subject only to the income tax rate which then applies to them. Employees who are currently paying higher rates of income tax on their employment income will commonly be able to draw income in retirement from their pension scheme tax free up to the personal allowance of, currently, £12,500 per annum and above that only subject to the basic rate of income tax. Only where lifetime retirement savings exceed £1 million could there be significant additional tax liability on retirement benefits.
Other types of investment do not benefit from such tax advantages nor do they provide the protection for employees afforded by the extensive pensions regulatory regime. Employers should review how their staff pension schemes are run, whether the range of investments offered is appropriate, whether the governance arrangements are sound and whether contribution rates are sufficient.
Employers may offer financial education to employees on budgeting and financial planning, including about individual savings accounts (Isas), to which contributions of up to £20,000 per year can be made, and which, while they do not provide immediate tax relief like pensions, grow tax free and can be readily accessed tax free.
Jeremy Harris is a pensions lawyer at Fieldfisher.