Six great tips to improve pension communications

Pension schemes are looked at by many with an air of mistrust. Surprisingly, it’s likely that this is not a recent problem. Back in Roman times, soldiers we’re provided an annuity in return for their service. There’s a little known theory that an unfunded pension scheme contributed to the fall of the Roman Empire. 

In our recent blog we have outlined some key events that have damaged the reputation of pensions.  But with 40% of the country’s wealth in pension schemes, we in the industry have a responsibility to educate individuals as to why retirement provision is so important. 

Here are my six tips on how employees can develop a better understanding, and become more engaged with their pensions:

 1.      Feel the fear but remain involved

Even with automatic enrolment, we shouldn’t underestimate people’s fears and mistrust that may lead them to opt out. We’re regularly asked in seminars; ‘is it possible to lose my pension?’, ‘are my pensions protected?’ or ‘what percentage of ‘interest’ will I receive?’ 

Pensions are normally invested in a range of assets, meaning their value will go up and down. There is never this beautiful straight line of growth that individuals like to see, and this can make people feel uneasy. Our first top tip is quite in depth, because it's important to outline the number of areas that can help people feel less fearful:

• There is risk to every investment – Even if you put all of your money into cash deposits, your money may be at risk to inflation because ￡100 today will most likely not be worth as much in 20 years’ time. So individuals shouldn’t be overly concerned that pensions are exposed to an element of risk, because there is always an element of risk. Also, this risk can be mitigated as explained later in this article.
• You will not receive the company contribution any other way – There are no other investments that companies can pay into before tax. If I gave you ￡5 and it magically turned into ￡10, you'd be pretty happy with that right? And even if the markets do take a tumble, your funds will normally need to drop a long way before they are at risk of cancelling out the element of contributions the company has made.
• You can change your funds to match your attitude to risk - Everybody’s attitude to risk is different but typically in your younger years, you are able to expose yourself to more risk than in the later years. In the later years, it is common to concentrate on capital protection. If you cannot bear the thought of your investment going down as well as up, then we would recommend you definitely remain in the pension, but select lower risk funds. Low risk funds can still go up and down in value, but the movements are not normally as dramatic as with higher risk funds.
• History is on your side – We’re not guaranteeing it always will be. You’ve no doubt heard ‘Investments can go up as well as down,’ and ‘past performance is not a guarantee of future performance.’ It’s really important individuals understand this reality. However; just to create some balance, it is reassuring to know that a) the markets have gone up 70% of their lifetime and b) There have been fourteen bear markets in the US S&P Index 500 since World War Two. When each bear market has reached its bottom point, every one of these fourteen times, the markets have bounced back fully within a 24 month period, to their pre bear market levels. 

2.      Register for online access

Individuals should register for online access so they can see how much is invested in their pension at any time. Statistic show under 20% of individuals register.  Therefore, it’s common for individuals to find out in their later years that they are not on track for their desired retirement income, and then they’re playing catch-up. 

To avoid this mistake, we recommend individuals register as early as possible so they can follow their contributions, view their fund value, and make the relevant adjustments as early as possible.  

We have a great communication strategy, where we have 60% of individuals registering for online access.

3.      Understand that pensions are the most tax efficient investment available

Pensions are the most tax efficient investment you can contribute to in the UK. Employee contributions will normally be made via relief at source, or salary sacrifice. More details of the contribution methods can be found in our group pension section  but to summarise, you’ll have at least a 20% uplift in comparison to most other investments. This is because most other investments are made after you’re earnings have been taxed. When you start drawing your pension, you can also access 25% of the fund as a tax free lump sum and lastly, pensions have death benefits attached where you can use them as part of your Inheritance planning. 

 4.      The power of compound

Compound is basically earning interest on interest or growth on growth. In simple terms, the earlier you start saving the better it’ll be for you. 

To provide an example of this, below are two scenarios where Simon makes ￡12,000 worth of contributions, but with stunning differences:

Scenario 1

Simon is age 45 and receives a bonus of ￡12,000. Simon sacrifices his bonus and pays it into his pension before tax. If Simon doesn’t pay anything else into his pension until age 65, and this grows at a rate of 6% year on year, by the age of 65 his pension will be worth ￡38,485.

Scenario 2

However, using the power of compound growth, if Simon had started contributing ￡40.00 a month from age 20, and this had grown year on year at a rate of 6%, by the age of 45, the fund would be worth ￡27,183. If Simon doesn’t pay any more into his pension, by age 65 it would be worth ￡87,179

Over double the amount for the same level of contributions!

5.      How much is enough?

Most individuals do not understand how much money they’ll need in retirement. This causes a problem because individuals do not save the required amounts. 

Seeking Independent Financial Advice is not achievable for all. Therefore, to get employees started, we recommend individuals create a detailed budget plan outlining what they earn and what they spend. This creates the foundation of what lifestyle the individual is living. After this, they can use one of the many pension projection tools available to establish a rough guide of what they need to save for their retirement.

A good Financial Advisor such as ourselves will undertake this exercise much more comprehensively, however, this recommended approach will at least provide individuals with a basic guide. As Yogi Berra once said “If you don’t know where you’re going, you’ll end up someplace else.”

 6.      Don’t rely on the state

This is probably one of the most important messages to grasp. If you have contributed 35 years full National Insurance contributions, the state pension will currently pay around ￡8,000 a year. For most this is not enough to live on so it shows how important it is to have personal provision. Of course there’s many provisions such as property, cash deposits, bonds etc. However, being that a large proportion of the UK has their capital tied up in the property their living in, having decent pension provision is the ideal scenario for most. 

The above reflects a small number of ways a company can be engaging its employees in a more effective way. 

I believe Financial Education should be part of the National Curriculum.  Unfortunately, it is often left to employers to pick up the pieces.  I’m passionate that with the right engagement, companies can have an important influence in people’s lives and futures.  The more engaged employers become with their employees, the better chance they have of retaining and recruiting key staff. Also, with more and more employees admitting that financial difficulties have affected their work performance, there is a real opportunity for companies to improve their performance and overall productivity.

Companies and their HR departments should be extremely careful when giving anything that may be deemed as ‘Financial Advice’ so we recommend companies seek the support of a qualified professional to engage its employees in regards to the above.

If you think some of the areas we’ve shared in this article are of interest, we would be happy to discuss your objectives and share some of our insights with you.   

 For further advice or information, please call 01483 881111 or email [email protected]