Need to know
- Employers can offer a variety of workplace savings schemes to meet employees' different financial priorities.
- Arrangements can include individual savings accounts (Isas), share schemes and additional pension contributions.
- Employers should focus their retirement support for employees on how much they pay in to, and the growth of, their pension investments.
Offering a variety of workplace savings schemes alongside pensions is a service offered by corporate wraps operated by the big financial and adviser firms. These platforms give employees the opportunity to contribute through payroll into a choice of savings plans such as individual savings accounts (Isas), and fund and share accounts, and manage their accounts online or via a smartphone.
These arrangements are attractive for lower-paid and younger employees who may want savings products to suit their short-term financial needs such as paying off debt, or saving for a mortgage deposit in a Lifetime Isa (Lisa) to obtain the government bonus.
At the other extreme, high earners may be attracted to the idea of having some, or all, of their savings in one place, and there may be practical advantages such as a facility allowing the proceeds of a maturing sharesave scheme or share incentive plan (Sip) to be rolled into their pension or an Isa tax-efficiently.
Older employees could also be approaching the pension annual or lifetime allowance limits and need to divert contributions to Isas or another type of tax-efficient savings plan to avoid exceeding these limits and incurring a tax penalty.
A wrap will allow employers to select different propositions to meet the needs of various employee cohorts, and negotiate advantageous group rates for staff. Jonathan Watts-Lay, director at Wealth at Work, says: "Personal calculations need to be made to determine the impact of annual allowance and lifetime allowance tax charges and if the employer is willing to offer a cash alternative to a pension contribution, this adds to the complexity of the decision.
"Many employers now offer a cash alternative to remaining in the pension scheme but unlike a pension contribution, the increase in pay is subject to income tax and national insurance. An alternative could be to divert contributions into a workplace Isa where at least the investment will benefit from tax-free growth. A cash Isa offers little benefit for the employee above what they could source in the high street or online themselves, but it is a different case when it comes to a stocks and shares Isa. This is because employers should be able to negotiate better deals with fund managers, in the same way as they would with their pension providers.”
Sips and sharesave schemes now allow monthly maximum contribution limits of £150 and £500 respectively, so employers could also consider increasing the contribution levels into share schemes, says Watts-Lay.
Alternatively, employees who have opted-out of their pension or have maximised their personal contributions, can make payment from their net pay to their spouse for them to top-up their pension pot. Tax relief would then be based upon the spouse’s personal tax situation."Additionally, if the spouse is a non-taxpayer, [the employee] can invest up to £3,600 gross per tax year which, net of 20% tax relief, up to £720, only costs £2,880," says Watts-Lay.
Lifetime IsasLifetime Isas (Lisas), which are geared towards helping first-time buyers and are available only to the under-40s, have not yet caught on, but could be used to allow employees to flex down a portion of their pension contributions.
Kate Smith, head of pensions at Aegon, explains: “The Lisa market hasn’t fully taken off yet, so there are few employers that offer workplace Lisas, but this is likely to change over time. Lisas are a good fit for workplace saving and sit well alongside pensions for younger employees, whose priority may be to save for a house. Potentially, they could also have a role to play for those who have hit the lifetime allowance, paid in more than the annual allowance, or are affected by the pension tapering rules, and want to build up more retirement income.
"Employers will need to re-think their reward and remuneration packages for higher-earning employees, to offer them more flexible and tax-efficient solutions for saving.”
Arguably, however, a strategy that could be interpreted as weakening long-term pension savings might not sit easily with some employers.Dale Critchley, pensions policy manager at Aviva, says: “We have seen very limited interest in a workplace Lisa. Encouraging lower contributions to pension, with the consequent loss of tax relief or matching employer payments, is seen as a risk that many employers don’t feel obliged to take. Most employers recognise that people aren’t saving enough in their pension scheme. People also need to take care when saving in a Lisa because any money not used to buy a home has to remain invested until age 60, unless they are willing to accept a penalty levied by HMRC [HM Revenue and Customs]."
Wraps can sometimes allow employees to pay into junior Isas and junior self-invested personal pensions (Sipps) via flexible benefits schemes or payroll. Very few people take up the offer, however. There is no tax advantage because contributions would come directly from the employee’s net pay. Moreover junior Sipps are extremely long term in nature because they are not accessible until the child has reached age 55, under present legislation.
Employee investment decisionsSupporting staff with investment decisions remains a challenge, because many start with only a basic understanding of their finances. Nathan Long, senior pension analyst at Hargreaves Lansdown, says: "Improving understanding does not happen quickly, it requires on-going support and financial education but the results can lead to staff retiring when they want and with sufficient income. Different employees have different financial priorities and offering the ability to save alongside a pension is crucial to meeting the needs of the wider workforce.”
There are quick fixes for employers, says Long. The two biggest impacts on what an employee gets in retirement are how much they pay in and the growth of their pension investments. Employers should focus on improving these for their staff and, therefore, help combat some of the issues of an ageing workforce.
Read more:
Scisys offers employees savings tools via workplace platform
Infographic: Employees' expected source of income in retirement
