Need to know:
- Pensions are still viewed as the primary workplace savings vehicle for employees, but other tools include the corporate Individual savings account (Isa) or the Lifetime individual savings account (Lisa).
- The Pension Freedoms Act has made pensions more accessible and potentially more desirable as a savings vehicle, but employees may opt to spend their pot prior to retirement.
- Employees should be aware that alternative options attract different tax treatments to a pension, and employers should consider seeking professional advice.
According to annual commentary from The Pensions Regulator (TPR), published in September 2018, 84% employees are now paying into a workplace pension. Pensions are still considered the number one savings benefit, and with minimum contributions due to increase from 5% to 8% in April 2019, this positive trend is likely to continue.
However, employees typically only begin to take a significant interest in their pension pot once they have stockpiled a set amount of savings. This is confirmed by Hargreaves Lansdown's The rules of engagement report, published in September 2018, which shows that employees become more engaged with their pension savings once they have accumulated at least £5,000.
Nathan Long, senior analyst at Hargreaves Lansdown, says: “For most people, pensions are the most important benefit, as they shape their life after work. Yet retirement often seems a long way off, and many employees aren’t encouraged to get to grips with their retirement planning, so often fail to understand the valuable benefit they’re receiving."
Although efforts to increase interest in pensions are undoubtedly valuable, should employers also be presenting other options to their employees, to ensure that everyone joins the savings trend?
The Isa
Isas are typically the most popular savings product after a pension, but there are a number of pros and cons, says Dale Critchley, pensions policy manager at insurer Aviva.
“Growth and withdrawals are tax-free and savers can take their money out when they want,” he explains. “But there are some cons, too. Namely, no employer contribution [and] if an employer wanted to contribute, they would need to increase an employee’s pay, which would mean increased national insurance contributions. [There is also] no tax relief on contributions [and] savers can take their money [out] when they want, which means they may spend it rather than save it for retirement.”
The Lifetime Isa
When it comes to Lifetime Isas (Lisas), savers can accrue a bonus of 25% up to £1,000 every year, which can be useful for those looking to get on the property ladder. It may also be helpful for self-employed, basic-rate tax payers, who are looking to save for retirement.
“There is an exit penalty if [individuals] don’t use a Lisa to buy a property or [they] access it before age 60, though," Critchley warns. "This is more than the bonus paid by the government. [The Lisa is] only available to the under 40s and [individuals] can only pay in until [they are] 50, but [they] can’t access the money until [they] are 60, unless [they] are buying a first home."
The £4,000 a year limit and the fact that there is no employer contribution or tax relief might also deter people from saving into a Lisa. “The 25% savers bonus is equivalent to 20% tax relief, but there’s no national insurance or higher rate relief,” Critchley adds.
The pension
Pension freedoms enable anyone aged 55 and over to take their entire pension amount as a lump sum, paying no tax on the first 25%; the rest is taxed as if it were a salary at their income tax rate.
Elliott Silk, head of commercial at wealth management organisation Sanlam UK, says: “The pension freedoms have certainly made [pensions] more attractive as a savings vehicle, despite tax penalties. It is also possible to pass unused money from a pension fund to [the] next generations, which is very appealing to savers and families."
Furthermore, a good pension scheme can act as key differentiator when it comes to retaining and recruiting talent.
“Minimum [auto-enrolment] contribution levels are currently at 5% of earnings, with 2% typically coming from the employer,” says Critchley. “Many businesses choose to offer an increased contribution or an increased matching scheme. [This] can help them stand out in a crowded recruitment market.”
Different vehicles for different needs
The pros and cons of each option mean that, depending on personal situation, a pension may not be the ideal benefit for some. However, it should still form a core part of any benefits offering.
“Workplaces are extremely diverse and have people at different times in their life and with a range of reasons to save,” Long says. “Employers should see Isas, [Lisas] and additional saving and investment accounts as supplements to the core workplace pension, not as an alternative to it.”
Helping staff save towards a variety of important life events, such as childcare costs, a house deposit or university fees, will engender a greater employer-employee connection, adds Long.
When it comes to weighing alternative investment products, however, employers should always seek out expert advice, says Paul Speight, UK relationship manager at Canada Life.
“While there’s plenty of websites out there that talk about alternatives to pensions, the gold standard is still unbiased advice from a professional adviser,” he explains. “They are the ones best placed to advise on the right retirement strategy. Even the straightforward Isa now has many versions, and choosing the right one for what [employees] are trying to achieve may not be readily apparent.”
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