The introduction of the Lifetime ISA has raised questions about the future of pensions. Helen Swire asks if alternative workplace savings are the answer
If as an employer you assume that your oldest workers will get the most out of their pension contributions, you’re about to hit another hurdle in the savings journey. The reduction in the annual and lifetime allowances mean that it’s not just younger savers who are looking for alternatives to the pension, but also the higher earners whose pots risk breaching these allowances.
And with the introduction of the Lifetime ISA (LISA) in the spring Budget, a further step is being taken away from pensions being the last word in staff savings vehicles.
“Many companies are now asking if, in terms of recruitment, retention and motivation, their benefits package is fit for purpose,” says Jonathan Watts-Lay, director, WEALTH at work.
“Those who are going to breach their lifetime allowance need an alternative to the pension – they should be saving that money in the way they would be doing if the regulations hadn’t changed.”
ISA limits will increase to £20,000 in 2017, and while contributions to workplace ISAs will come out of net pay, it remains a tax-free saving at the point of withdrawal. Many providers believe that a retirement income taken from a combination of pension and ISA would allow retirees to manage their income tax more efficiently.
Nonetheless, it is important that alternative savings such as share schemes and ISAs should not be regarded as a replacement for the pension.
Higher earners aside, most people’s pension savings limits of £40,000 per year far outweigh the maximum £6,000 of sharesave schemes and £1,800 of share purchase plans, while pension tax relief renders the contributions more profitable.
“While the return on investment for all three – share plans, ISAs and pensions – depends on investment performance, pensions have the benefit of longevity on their side and for the vast majority of members offer a balance of assets,” says Jeanette Makings, head of financial education at Close Brothers.
“To give employees the best possible range of savings opportunities, offering share benefits, ISAs and pensions together works well.”
However, there is more to this shift in workplace savings vehicles than outcomes for higher earners and retirees.
Flexibility, financial engagement and ease of access are key characteristics of the other savings options sought by the younger members of the workforce – whether through saving on tax through a high-interest corporate ISA or building up capital over the medium term in a share scheme or Save As You Earn (SAYE) scheme.
The LISA, aimed at encouraging young people to save for a house as well as a pension, has the capacity to make the new generations in the workforce genuinely excited about their savings opportunities, according to Kevin Wesbroom, senior partner at Aon Hewitt – and should also engender engagement with their employers.
Savers are entitled to put up to £4,000 into the ISA per year, and the government will match £1 for every £4 saved. Crucially, if the ISA is kept intact until the age of 55, there is no tax on withdrawal.
“We shouldn’t be telling young people to forget their debt and their priorities in favour of locking their money up for years in a pension,” says Wesbroom. “Out of a LISA and a pension, what would that segment of the workforce – everybody under the age of 40 – give more credit and value to an employer for?”
Watts-Lay agrees: “The LISA isn’t about abandoning pensions – it’s about not putting every last penny of your savings into a pension when you’ve other objectives. It needs more of a balanced reflection.”
Sharesave and SAYE schemes, equally, are not there to distract from other potential savings, but rather to encourage employees to build up decent financial pots in the medium term: and with the value being linked to company success, there is a significant reason for invested employees to stay productive and motivated.
“Sharesave allows employees to benefit from any potential company success,” says Louise Drake, national sales manager – growth and acquisition, at YBS Share Plan. “So there is a strong motive to make a financial return from such a scheme.”
Although this is a positive picture, however, there is still limited traction among the younger generation: YBS’s research has found that contribution levels increase with both age and income, with payments vastly increasing for those aged 35 through to 64.
As a saving tool then, share schemes might work – but they are still missing the mark with the younger, financially disengaged audience.
So where does the key to that engagement lie? With student loan debt, payday loans and house prices never far from the headlines, it could be in positioning savings vehicles of this nature as aids to making both debt manageable and saving affordable.
For example, money that an employee might use to pay off debt could be better invested in a workplace savings scheme, where the employer’s group buying power allows access to far better interest rates than on the high street.
There are alternatives for helping cash-strapped employees.
Jamie Jenkins, head of pensions strategy at Standard Life, says: “There is a strong case for helping employees pay off debt and some larger firms are already offering the ability to divert money above pension minimums for this purpose.”
Meanwhile, there is a growing demand for workplace loans through providers such as Salary Finance and Neyber. These allow employees to access funds without recourse to heavy-interest payday firms.
What is clear is that what organisations offer should reflect employees’ whole savings journey rather than just the endgame.
“Whether immediate spend, three to five year savings for a deposit, or lifelong saving for retirement, an employer can put savings vehicles in place to help: ISAs, share incentive plans, SAYE schemes and so on,” says Watts-Lay.
“Employees can then self-select, depending on where they are in that journey and what really matters to them, and can recalibrate as their life stages and objectives change.”
Healthy, wealthy and wise
Nonetheless, Jenkins describes both financial education and advice as “crucial” when it comes to ensuring that people make the right decisions: just another sign that helping employees manage their finances now goes far beyond making pension contributions.
Indeed, research from YBS Share Plan has found that those who have received some financial education are more likely to have engaged with their savings and made decisions over the past 18 months. They also contribute on average £30 per month more to sharesave schemes.
“The road to financial wellness does not begin and end with pensions, it’s much wider than that and needs to look at workplace benefits as well as other personal financial planning needs, such as mortgages,” says Close Brothers’ Makings.
“A financial education programme can help employees to understand the debt vs savings challenge, the need to focus on pension savings throughout their career, the power of using a budget and setting a financial plan, how share benefits can help to build savings, basic tax planning strategies, the importance of wills and estate planning, and how to evaluate their personal protection needs.”
A good employer’s job is never done: if you offer your workforce a wide choice of savings benefits, you should also ensure that they are making the right decisions. For those saving for a mortgage, there is a clear incentive to save via a LISA, while students just out of university may wish to clear their debts as soon as possible.
However, acting impetuously, even when it seems a sensible saving decision, comes with health warnings, says Dale Critchley, policy manager for workplace savings at Aviva. “Young people have a lot of plates to spin, so guidance and advice is really important. People saving into a LISA over a long period of time need to be careful that they’re not forgoing valuable employer benefits in the form of pensions contributions,” he cautions.
“And when it comes to paying off a student loan, you should look at the interest rate on the loan compared to the returns you would get by investing elsewhere.”
Critchley notes that the government’s increase of the tax-free allowance for workplace advice suggests that there is a recognition of the need for younger savers as well as retirees to manage their finances.
And beyond this acknowledgement, the increasing ties between monetary needs and healthcare are leading to a greater awareness of financial wellness.
Around 9.9 million working days are lost because of stress – and around 28% of anxiety sufferers say that the number one reason is financial worries.
“Without financial wellness there is likely to be a knock-on effect on mental and potentially physical wellness too, so including it in an employee benefits strategy is vital to ensure overall wellbeing,” argues Makings. “Financial education and access to advice will help to deliver improved financial wellbeing, but the most important aspect is that it must cause positive change.”
It’s not just a paternalistic approach: in offering education that helps employees make the right decisions with their money, employers are mitigating the risks around their staff being financially unable to retire, or mismanaging their money and being absent as a result of the consequent stress.
An uncertain future
So in this new world of multiple savings choices, where does the pension sit? And how can employers maintain its relevance to their staff? Younger savers will still need to build up retirement pots.
“We need to adopt methodology that they’re familiar with, such as online tools, interactive conversations and one-to-one communication,” says Aviva’s Critchley.
The development of a flexible pension ISA over the next 12 months – perhaps in 2017 spring Budget – has been mooted.
More solid (and despite the reservations of pensions minister Baroness Altmann) is the prospect of a pensions dashboard. This would be a space where the pension schemes and the State Pension sit, alongside interactive tools and modellers, the idea being that savers can see all their pots in one place, understand their potential retirement income, and make financial decisions accordingly.
“Technology is still immensely important: and the government should be doing everything it can to facilitate the technology and support digital advice,” says Aon Hewitt’s Wesbroom. “It’s key for the younger generation: they naturally gravitate towards technology and pulling all the information together that way.”
Several companies, Aon included, are already delivering technology that does a similar job to the dashboard.
“We’re actually delivering it right now, a space where you can pull all of your financial information together so you can make a better-informed decision,” continues Wesbroom. “The government wouldn’t have to do much to build it further, they’d just have to facilitate it.”
The question to ask now is if the pensions industry can coordinate itself with the bigger workplace saving picture – or if it will lose the chance to engage younger savers drawn away by the allure of flexible finance.