Why your staff may never be able to retire comfortably

  •  By
  •  Murray Humphrey

It's partly because a lot of pension products are pretty rubbish.

Businesses have to offer employees a workplace pension; the UK government made auto-enrolment mandatory in 2012. Also mandatory was the 8% minimum contribution. Typically this means the company will contribute 3% of an employee’s salary, with the employee putting in 5%.

Most employees ‘set and forget’ once they’re enrolled. Pensions are commonly seen as boring and complicated; if you’ve been included in one it’s one less thing to think about that’s out of the way. Job done!

But here’s the thing: 8% simply isn’t going to be enough for most people to retire comfortably. It’s not hyperbole to say that this is a ticking time bomb for you, your staff and, sadly, the whole of the UK.

The pension poverty crisis is very real. The government’s pension commission recommended that people should be saving for an annual retirement income of 60-70% of their current income.

But it also found that, even with their workplace and state pensions, 62% of people will not achieve that. A fifth of people in the UK will face poverty in retirement, according to the Pensions and Lifetimes Savings Association (PLSA).

Although minimum auto-enrolment contributions won’t solve that issue, it’s never too late to act. Read on to discover the low and no cost actions you can take to improve things.

Living longer means more retirement years to pay for

Brits are enjoying more years of retirement than they used to. In the last 50 years, life expectancy has risen by 10 years in the UK, from 72 to 82. You can access your private pension from the age of 55 – but if you do, you’ll need to think about how you’ll pay for 27 years of retirement (assuming an average lifespan).

With increased longevity, the risk of people outliving their savings becomes more significant.

People remain ignorant to this because an annual statement letter from their pension provider doesn’t paint a clear picture of what their post work life is going to look like.

It doesn’t tell them how they can work out how much they might need and it doesn’t tell them what their annual pension income will pay for. In other words, that annual statement letter means very little to them, which will lead to a lack of engagement.

This is the fault of the pension providers, who should be doing more to help people prepare for retirement. After all, they’re doing very nicely (thank you) from the profits. Advances in technology mean all pension providers could offer solutions – like we do with our app – to help people understand how much they need to save and what that will pay for.

Many pension products are rubbish

Low engagement may be a good business model for your current workplace pension provider and their investors, but what will the real cost be for you and your employees in retirement?

The workplace pension is your most expensive workplace benefit so why not get more out of it? Provide something your staff actually love, value and that helps them take control of their financial future.

Employees can’t be blamed for the ‘set and forget’ attitude we described at the beginning of this article. Years of jargon filled explanations of how a pension works have contributed to low levels of financial literacy.

And lives are busy these days; getting an uninspiring statement letter annually from a pension provider describing an amount that doesn’t translate to later life only contributes to a lack of engagement. In short, a lot of pension products are rubbish.

To keep on top of how much they need for later life, a pension needs to be easy to use. What that means these days is one that sits on your phone (or laptop), with a clear view of how much you’ve got saved and what that might mean when you retire.

It also means being able to manage a pension more easily – changing contributions with a couple of taps, topping up if you find you have a bit more cash one month and being able to transfer in old pensions easily. We’re happy to say our app does all of that.

The cost of living

We couldn’t avoid this one currently of course. When finances are stretched, what pension companies and employers should be doing is trying to figure out how people can continue paying for everything without their future savings being impacted.

It’s why we love working with companies to implement salary sacrifice. Read our dedicated page about salary sacrifice pensions for more detailed information but suffice to say that it’s a way for employees to maintain their pension contributions but – and here’s the magic – see a bit more in their take home pay.

Essentially a tax hack that gives back, it reduces the National Insurance (NI) contributions individuals have to pay.

Because we’ve worked with so many companies to implement this now we’ve got an established process in place that we’ve perfected over time, with plenty of hand holding on offer for HR or Finance Leads whose job it is to process the change. It’s probably also worth mentioning that companies are drawn to it because it means they pay less tax too.

It's so easy, obvious and beneficial for companies and staff to pay their pension contribution by salary sacrifice, we're amazed that more pension providers aren't helping their customers implement it. Is yours?

Closing thoughts

The UK government's introduction of auto-enrolment into a workplace pension scheme, with a minimum contribution of 8% of an employee’s salary, was a step in the right direction when it was announced back in 2012.

However, it may not be enough to secure a comfortable retirement. Longer life expectancies, rising costs, and (perhaps worst of all) bad pension products, have all made the outlook more complex.

By empowering your staff and giving them access to a great workplace pension that engages them and provides the right tools and support, they can start making informed decisions about whether it's the right time to increase their contributions beyond 8% (ideally via salary sacrifice so it's tax efficient).

For our part, we’re trying to do our bit by making pensions easier to understand and manage, both by providing customers with tools (like our pension app) that make that easier, and providing support when they need it.

Now you're aware of the impending crisis, read Top 5 reasons why your workplace pension is failing your business to discover the benefits of switching your workplace pension provider and see how just how simple it is.

Find out how Penfold can bring financial wellbeing to your team, book a demo today.

A photo of Murray Humphrey

Murray Humphrey


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