Since auto-enrolment commenced back in 2012, employees around the UK have been benefitting from contributions paid into their pensions by their employers. This, combined with the new pension freedoms allowing anyone over the age of 55 to take out their entire pension amount as a lump sum, paying no tax on the first 25%, has made pensions an increasingly attractive savings vehicle.
Below we look at some of the considerations of workplace pensions.
Arranged by employers, rather than the individual or the state, workplace pensions combine payment contributions from both the employee and the employer. Under the current auto-enrolment rules, the minimum level of contributions is 5% (with at least 2% paid by the employer), which is set to rise to 8% from April 2019, of which at least 3% is paid by the employer.
There are two main classes of workplace pensions:
Defined Contribution (DC) or Money Purchase Schemes – income on retirement is determined by the amount of money contributed, any related charges or fees and the stock market performance of the fund in which the pension is invested. Typically found in the private sector.
Defined Benefit (DB) – income on retirement is effectively guaranteed by the employer and is predetermined by a formula based on the employee’s earnings history, tenure of service and age. These types of schemes are becoming less common, as many organisations offering these have been closing them in recent years. Typically found in the public sector.
Employers are also required to periodically re-enrol eligible staff who chose to opt out – this occurs every three years after the employer’s initial staging date.
With an aging population, and experts raising concerns over the sustainability and affordability of our state pension system, private and workplace pensions are providing a welcomed source of additional retirement income. With people spending more years in retirement, an increase in the state pension age and greater flexibility in working patterns, access to a workplace pension forms an integral part of an attractive financial benefits package.
As one of the mostly costly components of a business’ remuneration package, after basic salaries, it is important that pension schemes are implemented in a way that results in them being viewed as a valuable addition to the company’s overall profile.
Director at Finura, Nathan Mead-Wellings comments: “Since the advent of auto-enrolment, the key consideration for businesses isn’t whether to offer a workplace pension scheme but to determine the details of the scheme itself and which one is best for the organisation and its employees. In some cases, we are seeing companies implementing increased contributions or an increased matching scheme in order to differentiate themselves from other employers in the market and use their pension scheme as a tool to boost staff retention rates.”
For a pension scheme to be effective, its value needs to be understood by those who will benefit from it. Behavioural research has shown that workers tend to under-value rewards that they cannot experience immediately. As such, it is important that employees can visualise how the scheme is going to assist them in meeting their future financial objectives. This can be achieved through a combination of effective communication and financial education, helping employees to understand how the scheme works and the benefits of planning for their future financial wellbeing. It has been shown that employees with reduced concerns over their financial future have improved mental wellbeing and perform better at work.
It is also important to consider a scheme that fits with a wide range of employee circumstances – whilst older employees are more focused on what is being paid into their pensions now, younger employees may be more concerned with saving for a house deposit. In these circumstances, a flexible benefit scheme that allows employees to alter their levels of contribution depending on what stage of their work and life cycle they are at, for example, may be a potential solution.
Nathan adds: “Depending on the level of responsibility that employers wish to take for their employees’ financial security, there are a variety of workplace pension strategies that you can take. Whether it be a defined contribution, a defined benefit or hybrid arrangement, we can help businesses formulate a solution that works for both employer and employee and that minimises the impact of pension implementation on your business.”
If you would like advice on how to implement a workplace pension for your business, please contact Finura.
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