Why axing pension saving should be a last resort for employees
There was a glimmer of hope at the end of last year as overall inflation dropped for the second month in December, with some predicting single digit inflation by the end of 2023.
But, as usual, the devil is in the detail and what is really putting pressure on family budgets are energy bills and food costs, with the latter rising at a rate not seen since 1977.
The bottom line is, despite the headline figures, the cost-of-living crisis is far from over and many employees are still struggling to make ends meet, forcing them to look at ways to increase their disposable income, including diverting money earmarked for savings to pay for today’s expenses. Inevitably this for some includes looking at how much they pay into their pension.
Pensions come under the blade
Although the number of employees opting-out of pension schemes is not yet overly concerning – with Cushon’s research showing just one in 10 (11%) are considering doing this – the risk is that people will increasingly be forced to cut pension contributions or even opt-out totally, as increased living costs continue to be felt.
If this goes unchecked, a cohort of employees will be sacrificing a lot more than they realise in their attempt to pay for rising costs today. There is always a balancing act of spending today vs saving for the future, but the cost-of-living crisis makes this a massive challenge for an increasing number of people.
Despite these concerns, employers and providers need to make it easy for employees to take any action they feel is in their best financial interests. But we also need to do everything we can to ensure that cutting pension contributions or opting out is a last resort.
We need to make sure that employees are given all the education, information and support they need to fully understand what they are really giving up (now and into the future), so they’re able to make informed decisions.
It's not about putting up barriers, it’s about helping people evaluate their options to make sure they’re not making rash decisions that will have massive implications later in their lives. And this is about making sure they really understand their pension.
Tell them about the free money
Tax relief is free money from the government, but well over half (57%) of people responding to our research don’t know how much tax relief they get for paying into a pension. This means some employees are likely to overestimate the impact of stopping pension contributions.
Then, of course, there’s the employer contribution, which for many is the big number in the free money equation.
If they knew through tax relief and employer contributions they were, for example, losing £160 to gain £80 would they make a different decision? We need to make sure that employees understand what they’re going to lose.
Others ways to help
Some simple restructuring of the pension scheme with little-to-no cost can really help push the decision of opting out of pensions off the radar, or at least well down the line.
Salary sacrifice, for example, is the no-brainer of pensions – simply changing the way employees pay into their pension can save both them and you, the employer, money that can help bolster take home pay or savings. It not only helps with costs today, but it makes the message about pensions even more positive.
Then there is pension redirect. The balancing act between saving for tomorrow and spending today is getting more difficult for a lot of employees, but this can really help. Pension redirect allows employees to have some of their pension contributions paid into accessible savings so if they experience financial difficulties, they’ve got a pot of rainy-day money. It means people are still saving for retirement but have a financial buffer.
When looking to save money, employees usually look at amounts that are coming out of their bank accounts rather than their salary. But as things become tighter, salary deductions like pension contributions are more likely to come into scope. We owe it to employees to make sure we’ve collectively done everything we can to make this a last resort – employees’ future selves will thank us.
In partnership with Cushon
Cushon is an online savings&investments platform provider, offering holistic workplace savings.