October 28 2022

Retirement planning: Why pensions need a facelift

Retirement planning and pensions might not be at the top of everyone’s agenda. In fact, over 20% of people in the UK don’t have any pension savings. Yet 45% want a retirement income of £20,000 or more per year.  

Having a pension is a critical part of financial wellbeing in later life. So when employees are absorbed in the demands of daily life, how do you encourage them to think about retirement planning and pensions? Let’s talk about ways you can motivate them to save for tomorrow.

How do most pensions work?

Most workplace pensions and self-invested personal pensions (often called SIPPs) are defined contribution pensions. 

With a defined contribution pension, money is invested in a diverse range of assets, such as bonds, commercial property, gold, shares, and stocks.

Typically, an employee makes contributions to their pension each month. This is normally a percentage of the employee’s salary. 

Employers must also make contributions. The minimum contribution for employers is 3%.

What is pension auto enrolment?

Most employees are eligible to join a pension scheme through their employer. Their employer must enrol employees into the scheme, and this is called automatic enrolment.

Find out more about auto enrolment on the Gov.uk website.

Pensions are a key part of an employee’s overall compensation package, or benefits package.

Can I opt out of my pension?

Some people don’t see the benefits of joining a pension scheme or think their money is safer elsewhere. 

But according to MoneySavingExpert, a pension is simply ‘…a tax-efficient savings option that isn’t implicitly risky. The risk comes from the investment choice.’ 

Employees can opt out of their company’s pension scheme or delay their enrolment for a limited time. So why do some people choose to opt out of their pension? 

Retirement is too far away – why do I need a pension? 

It’s never too early to join a pension scheme. Contributing towards your pension early means not having to put as much money into a pension pot every month. 

Starting early also means your pension pot (which is money that gets invested) has time to grow. The idea is that by the time you reach state pension age, there is a substantial pot of money to support you through retirement.

I want to invest my money elsewhere 

Some people choose to invest in property instead of joining a pension scheme. That’s because property has historically always risen in value over time, even when prices have dipped in the short-term.

However, the spread on an investment that focuses solely on property is limited. With a pension, money is invested across different types of investments, thereby spreading the risk. 

Property sales are subject to capital gains tax, income tax, and inheritance tax. In contrast, pensions have huge tax advantages.

I don’t understand pensions – am I better off without one? 

The information surrounding pensions can be complicated, so it’s easy to put it off. 

Many people are ‘time poor’, meaning they don’t have much opportunity to make sense of difficult financial information. Time poverty is an issue that particularly affects those with young children who have 14 hours less free time a week than people living alone.

On top of this, many people are consumed with more immediate financial concerns, so wading through pension information isn’t a priority. Most people in their 20s, for example, were struggling to pay their rent well before the cost-of-living crisis hit.

To address this issue, information needs to be easier to understand and digest, more engaging, and give greater clarity about the benefits of a pension. 

We talk about how to make pensions interesting later in the article.

Why should I pay a fee for my pension?

People are concerned about high pension charges, but this is more likely to be an issue with older pensions

According to ProPensions, an annual charge of less than 1% is reasonable. It’s important that employees keep track of their pensions and understand the charges they’re paying as it can impact retirement income.

Could the company my pension invests in go bust?

Money invested in pensions can go up and down, and it’s the same with any kind of investment. However, it’s the pension provider’s professional duty to monitor people’s pensions and move investments if needed. 

If the pension provider is found to be negligent, customers have some protection from the Financial Services Compensation Scheme (FSCS). The FSCS will pay £85,000 for each firm where money is invested.

If a pension provider goes out of business, people can usually claim back 100% of their pension savings from the FSCS.

Why do people think retirement planning and pensions are boring? 

The information surrounding pensions is often full of jargon and difficult to understand. To encourage people to start a pension, it’s important to address their concerns. 

It’s also vital to bring employees’ attention to the benefits of a pension for them. Government research found that just 44% of people aged 35-49 thought they needed to find out about retirement planning and pensions.

The main advantages of contributing to a pension include:

  • Free money: Due to tax relief, a basic rate taxpayer gets £125 in their pension pot for every £100 they invest themselves. They also receive a contribution from their employer of at least 3% of their salary.
  • Tax-free lump sum: Upon retirement, people can withdraw up to 25% of their pension savings, tax-free. This means that if they still have a mortgage, they can pay it off.
  • Investment options: Guided by advice from their pension provider, people can choose the level of risk they want to take with their pension investments (low, medium or high) and watch their investment grow. 
  • Provide inheritance for family: A pension isn’t lost when someone dies. They can pass it on to those they choose in their will.

How can employers make pensions and retirement planning more interesting?

Pensions need reframing in the eyes of some employees. When people hear the word ‘pensions’, they often glaze over. The word ‘investments’ conjures up a very different image, with words like risk and expensive coming to mind. 

But, there are ways employers can encourage more engagement from employees with pensions. 

1. Reimagine the presentation and delivery of pension information

People can’t be expected to engage with a subject they don’t understand. Simplifying the information around pensions and delivering information in an engaging way can make a huge difference. Visual images aid most people’s understanding, so you might consider using videos and animations to explain concepts. 

Start by selling the benefits of pensions and addressing people’s concerns. Help them understand why retirement planning is for everyone of any age, not just those approaching their golden years. 

2. Help people see their pension investments grow to help them plan their retirement

People are more likely to increase their pension contributions if they can see their investments grow. 

Most pensions can be tracked and managed through a mobile-friendly portal or app. The convenience of an app is likely to appeal to younger employees and those with busy lives – so that’s most people!

3. Paint a positive pension picture

Instead of talking in abstract percentages and statistics, help people to picture their investment. 

Show employees the companies where their money is invested. Is their investment helping a company to design new equipment for hospitals, build a new transport system or do something else that’s interesting?

Once people are engaged, you can introduce more detailed information to help them understand how their money is working to meet their goals.

4. Provide support about all aspects of retirement planning including pensions

When people care about their pension pot, they’re likely to have questions. 

Make sure they can easily get in touch with well-informed pension champions at your organisation. An FAQ sheet can be good for some, but others want to speak to someone face to face, so be aware of different employees’ communications preferences. 

Celebrate Pension Awareness Day

Pension Awareness Day takes place every year on 15th September. One of the aims of this national day is to encourage employers to share ideas about how to engage employees with pensions.

For many employees, a pension is something intangible and potentially low priority. However, by taking a fresh approach you can help them visualise their future and motivate them to start saving towards a healthy retirement income. 

The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.