Pensions 101: top questions and answers

What would you recommend as the minimum amount to pay into a pension?

How long is a piece of string! Typically, a good rule of thumb is a total percentage equal to half of your age. Another good tip is a total of 15 per cent of salary on an average of your whole working life. What is certain is that the earlier you start saving and the more you can save, the greater the chances you have of meeting your retirement goals.

How do we help our younger people make a decision for pensions vs saving for an asset?

It is great to see that more and more employers are viewing pensions as just one component of financial wellness, recognising that younger individuals may want to focus on getting on the property ladder or clearing debt before pension saving. One solution is to ensure these people hit minimum pension contributions under auto-enrolment (AE) but then allow them to redirect everything else to a Workplace ISA, where funds can be easily accessed when needed.

Are pensions the be all and end all for retirement savings? What about using property and non-pensions savings?

There are other forms of saving, including investing in property, the stock market and other such investments. However, pension saving offers unique advantages including tax relief on contributions and competitive charges. What’s more, it is possible to invest in many asset types such as property indirectly via your pension provider’s platform anyway.

An extremely high percentage of my employees are going into the default fund – should we be encouraging more individual fund choice?

Choosing your own investments isn’t for everyone. That’s why default fund options are available, to allow individuals to benefit from managed options that automatically move funds from higher growth assets into lower risk as the individual approaches retirement. But self-selection of investments can improve engagement with the pension scheme, so communications should remind members of their options.

Do savers really care about environmental, social and governance (ESG)? And if they do, what is the best way to find ESG funds?

ESG refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company. So for some savers ESG will be a consideration, for others their concern will be generating high enough investment returns to certify their fund size is sufficient for them to stop working. Ensuring the range of investment options includes ESG and ethical funds means all members can choose the right path for them.

Lots of my people are interested in cashing in their defined benefit (DB) schemes – should I help them do this?

This is a major headache for the Financial Conduct Authority, with pension scams an increasing problem since the introduction of pension freedoms. Increased flexibility at age 55 has encouraged shady companies to sell the concept of giving up generous DB pensions and transfer to money purchase plans to access them earlier – our view is that employers have a duty to educate staff on these dangers and underline the importance of seeking independent financial advice from trusted partners.

Do you think AE opt-out rates will increase next year?

The opt-out rates following the 2018 AE contribution increases were much lower than they might have been, suggesting employees are becoming increasingly engaged with pension saving. The increases next year may however be too much for some. As with any legislative changes, timely and clear communications can prepare your staff in advance and help to sell the benefits of the increases coming into force in 2019.

To see all the questions from our Q&A, check out the #AskNeil thread. To learn more about some of the UK providers we have worked with then download our pension provider report. And of course if you have any more questions do not hesitate to contact us.

The author is Neil Atkinson, head of proposition, consulting at Thomsons Online Benefits.

This article was provided by Thomsons Online Benefits.

Thomsons Online Benefits is sponsoring REBA’s Innovation Day, taking place on 22 November at County Hall, London.