Why you should encourage your employees to think more about their pension contributions
Jamie Jenkins | February 19, 2020
Since auto-enrolment changed the pensions landscape, most workers in the UK now have regular contributions going into a workplace pension on their behalf. Although this is a very positive step, little is being done to encourage people to save for retirement beyond the statutory 8% minimum. So what can be done to motivate employees to save more for their future?
What employees need to know about their workplace pension
Auto-enrolment means that you’ll pay at least 3% of an employee’s salary into their workplace pension every year. And if you offer matched contributions, the more they pay in, the more you will too.
The tax advantages of a pension
A pension is arguably the most tax-efficient way for employees to save for retirement. They’ll get tax relief on their contributions at their marginal rate of income tax, whether that’s 20%, 40% or 45%. So if they get 20% tax relief, it normally only costs them £80 to save £100 into their pension. And if they pay higher rates of tax, saving more can cost them even less. No other savings product offers tax incentives in this way.
A pension is arguably the most tax-efficient way for employees to save for retirement.
A pension is also largely tax free once money is invested. Then, when employees come to take money from their pot, 25% is tax free. The remaining 75% is taxed, but they can mitigate how much tax they pay by taking smaller regular withdrawals, rather than all at once.
So, even if employees are higher rate taxpayers now and get 40% tax relief on their contributions, there’s a good chance they’ll only pay 20% tax in retirement. And of course they’ll usually get a quarter of their pension pot tax free.
A workplace pension can give employees peace of mind
Unlike a personal pension, a workplace pension benefits from various additional rules and regulations.
There’s a charge cap of 0.75% each year, meaning employees will never pay more than that when they are in the default investment. Workplace pensions also have either a board of trustees or an independent governance committee, which provide an additional layer of governance.
These boards and committees are tasked with things like making sure schemes comply with the charge cap, that the default investment option is appropriate, that environmental, social and governance (ESG) issues are considered, and that schemes are secure and generally well run.
The need to do more to engage your employees with their pension
You can play a big part in making sure that your employees are informed and understand what they have, what they’ll get and what their options are to pay more. Many employees need help understanding how a workplace pension can have a positive impact on their retirement outcomes.
You can also reinforce the message that the 8% minimum contribution is exactly that – a minimum. Most commentators would suggest a figure between 12% and 15% is more appropriate to enjoy a reasonable outcome at retirement.
It can be challenging to engage someone with something that may seem very far ahead in their lives. But that doesn’t mean you can’t engage employees with what they have now, how it’s performing, and what they’re building towards. This is where Standard Life can help you.
How Standard Life can help you and your employees
Our ‘ready-to-go’ campaigns are designed to support your employees with the choices they have as they save for their future. There are 18 different campaigns available for you to order at no extra charge.
The Money and Pensions Service is the new single body which brings together Pension Wise, The Pensions Advisory Service and the Money Advice Service. It offers additional impartial support and guidance on pensions for both you and your employees.
The views expressed in this blog should not be regarded as financial advice.
It’s important to remember that a pension is a long-term investment and as such its value can go down as well as up and could be worth less than was paid in.
Tax rules and legislation may change. Information is based on our understanding of tax rules and legislation as at February 2020. Tax rates and thresholds depend on personal circumstances and where you live in the UK.