Why Your Employees May Not Achieve a Comfortable Retirement

As an employer, you’re obliged to provide your staff with a workplace pension – a mandate made compulsory by the UK government in 2012. The required minimum contribution is set at 8%, typically comprising of a 3% contribution by the employer and a 5% contribution by the employee.

Unfortunately, a considerable number of employees adopt a ‘set and forget’ approach once they’re enrolled in a pension scheme. Given the complexity and lack of excitement around pensions, it’s seen as one bit of life admin taken care of and quickly forgotten.

However, a serious issue is at stake here: an 8% contribution will not be enough for most people to enjoy a comfortable retirement. It’s a stark reality that could have profound implications for you, your workforce, and the broader UK population.

The imminent pension shortfall crisis cannot be ignored. The government’s pension commission has suggested that individuals should aim for an annual retirement income comprising of 60-70% of their current income.

Yet, the reality is that, even considering their workplace and state pensions, 62% of people will fail to meet this target. The Pensions and Lifetimes Savings Association (PLSA) has alarming data, predicting that one in five people in the UK will experience poverty in retirement.

Although increasing the auto-enrolment contributions won’t fully rectify this issue, taking action now can make a significant difference. Continue reading to uncover low and no-cost measures you can take to alleviate this situation.

Increased life expectancy means a longer retirement period to pay for

Over the past half-century, UK residents have experienced a rise in life expectancy by ten years, from 72 to 82. As a result, individuals now have to plan for more retirement years than before. You can access your private pension from 55, but if you do, you also need to figure out how you’ll fund potentially 27 years of retirement, considering the average lifespan. With increased longevity, the likelihood of individuals outliving their savings becomes a stark reality.

Many remain oblivious to this fact, as an annual statement from their pension provider fails to provide a comprehensive overview of their future retirement life. That letter doesn’t provide the means to calculate future needs or what living costs an annual pension income will cover. This, coupled with the apathy of pension providers in assisting individuals to prepare for retirement, leads to a severe lack of engagement.

Poor pension products are the norm

Your workplace pension is one of the most expensive benefits you offer your employees. So, why not ensure it delivers real value? An engaging pension product will be one that employees really value and one that empowers them to manage their financial future is essential.

You can’t fault employees for adopting the ‘set and forget’ mentality mentioned earlier. The complexity of pensions and low levels of financial literacy, coupled with busy lives and underwhelming annual statements, contribute to the disconnect. Regrettably, many pension products on the market are simply subpar.

For employees to stay informed about their future needs, they require a pension scheme that is intuitive and user-friendly. This means a product that integrates seamlessly with their daily lives, easily accessible via a mobile device or laptop. It should provide clear visibility of their savings and what that could mean for their retirement. At Penfold we’re proud to say our app accomplishes this.

The rising cost of living

Current financial pressures highlight the need for pension companies and employers to help individuals maintain their standard of living without compromising their future savings.

That’s why at Penfold we love working with companies on the implementation of Salary Sacrifice. In a nutshell, this mechanism allows employees to maintain their pension contributions and even enjoy a slightly higher take-home pay. It’s a clever tax manoeuvre that reduces the National Insurance (NI) contributions individuals need to pay.

Having helped numerous companies to implement this strategy, Penfold has refined the process over time – offering substantial support for HR or Finance Leads tasked with the transition. It’s worth noting that companies also find salary sacrifice attractive as it results in lower tax payments for them.

It’s surprising that more pension providers aren’t promoting the advantages of paying pension contributions through salary sacrifice to their clients. Is your provider helping with this?

When the UK government mandated auto-enrolment into workplace pension schemes in 2012, it was a move in the right direction. However, the current 8% minimum contribution, longer life spans, increasing living costs, and the prevalence of substandard pension products have added layers of complexity to the retirement outlook.

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By empowering your employees with an engaging pension scheme that provides the necessary tools and support, they can make informed decisions about potentially increasing their contributions beyond the mandatory 8% (ideally through salary sacrifice for tax efficiency).

Penfold’s workplace pension aims to make things simple and more manageable, equipping customers with intuitive tools like our app and offering support when needed.