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
The provision of occupational pensions is not regulated by the Financial Services and Markets Act 2000 and neither is much advice provided in relation to them. As such, safeguards to ensure that a ‘product’ is appropriate for an employee’s circumstances do not apply as they do in the retail financial sector. However, 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.
We need to stop being ethereal and start being practical about the need for financial education in the workplace. For compelling reasons let’s get straight to the point. A significant part of the modern benefits package may also include share schemes, such as - save-as-you-earn (SAYE) and the share incentive plan (Sip) which are attractive investment opportunities, but are relatively complicated and very often little understood, so take-up can be low.
Information is usually provided through brochures, intranet sites, letters or emails but ‘information’ is passive. The employee must read the communication and understand it before deciding to take action.
Education is different as it allows for a deeper understanding of the subject and the significant benefits offered by joining the schemes. If employees are educated they have the opportunity to make an informed choice.
Best practice is likely to make financial education a recognised part of the benefits programme and with the various benefits available it’s easy to see why employees need assistance.
One example is pensions simplification because of two major developments - the ability to increase levels of contribution into pension - now up to 100% of earnings or equivalent in any one tax year; and concurrency - the ability to run a separate pension alongside the company scheme.
Employees now have the opportunity to significantly enhance the benefits already provided using ‘joined up’ investment strategies.
For example the Sip, introduced in 2001 is a tax efficient way of purchasing company shares from pre-tax income, giving an effective ‘discount’ on their purchase because of tax and national insurance savings. After five years, shares within the plan could be withdrawn without a tax or national insurance reclaim by HM Revenue & Customs. Under separate legislation employees were allowed to transfer the proceeds into a pension and receive two ‘helpings’ of tax relief on the same initial outlay, giving a significant boost to their retirement capital.
Technically this link was possible, but there were two major obstacles - the limits placed on how much company stock was held in the occupational scheme and the cost and additional administration placed on the trustees and administrators. Therefore, no schemes allowed it to happen.
Now, pensions simplification makes it possible. The higher annual contribution limit allows an employee to accumulate stock in the Sip over a number of years and roll the stock tax efficiently, if done within strict time limits, into a pension. Concurrency allows the employer to maintain their existing company pension scheme but also to make available the vehicle that makes the share transfer possible - the self-invested personal pension (SIPP).
However, providing a “SIPP Wrapper” alone is at best academic as people will not use it if they don’t understand it and at worst problematic, as people will be prone to making mistakes if they act in ignorance of the rules. Making a SIPP available to employees means that the main company scheme needs no change to the rules and therefore no additional admin burden.
Employers just need to get employees to understand the fantastic new opportunities available to them by linking the two. The answer has to be financial education.
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.
