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Time to grasp key messages about pension funding levels

1 June 2017

Even though most employers are now required to make pension contributions for employees under the government’s auto enrolment regime, awareness of the level of funding that their employees need in order to secure a comfortable retirement is conspicuously lacking.

The fact that so many senior managers have themselves been used to enjoying guaranteed benefits from final salary schemes – where the employer as opposed to the employee takes the investment risk – has undoubtedly contributed to this situation. They have never had to sit down and analyse the size of money purchase scheme pot required to produce a worthwhile retirement income.

Indeed, a friend of mine who works in a HR function and who is currently looking at his company’s pension issues admits that, because he had always been in a final salary scheme, he “thought a pension was a pension.” But when he got a feel for the size of the money purchase pots most of his employees had built up he realised they were hopelessly small.

It is not only the employees who stand to lose out if they can’t afford to retire at the time they originally intended. Having significant numbers of staff who choose to work into their 70’s can play havoc with an employer’s succession planning and, since the abolition of the Default Retirement Age in 2011, the employer is powerless to defy their wishes. So all HR departments should ensure they have a basic understanding of the pension goals their employees need to achieve.

As a broad rule of thumb, employees should expect to be retired for 20 years – or a third of their adult lives. During this time they are unlikely to need the same income as they do while they are working because their outgoings should reduce. Not only will they no longer have to spend heavily on travelling to work and dressing appropriately for it, but they are also likely to be more conscious of the need to be more frugal now that they no longer have prospect of future promotions and salary increases.

Every individual will have different requirements, but the government suggests that those earning over £51,300 a year should aim to secure a retirement income of 50% of salary, those earning £22,400 to £32,000 a retirement income of 67%  and those on £32,000 to £51,300 a retirement income of 60%.

For someone on the average UK wage of £26,500 to achieve a 67% retirement income (including the State Pension) of £17,755 would require a pension pot of £355,100 – assuming they don’t take a tax-free lump sum, that their pension investments grow by 5% a year and that they purchase a level monthly annuity. 

If someone saved from the age of 30 up until a retirement age of 68, to achieve this they would need to start off by saving £3,580 a year and to increase their monthly pension payments by 2.5% a year.       

Not all employers will feel able to increase the levels that they contribute towards their employees’ pensions to meet such objectives. Although we do have clients that pay in 12% of salary, and we are aware that some banks pay in as much as 20%, most smaller companies only contribute the mandatory minimum of 1%.

Chase de Vere would be happy to discuss with employers of all sizes whether it is likely to be feasible for them to raise their pension contribution levels but even those who feel they can’t afford to do so should at least be thinking about ways of making employees aware of the funding tasks facing them.

Informing them of their ability to check their State Pension entitlements via
www.gov.uk/check-state-pension, to access useful generic online information or to receive free guidance from the government’s Pension Wise service (Tel: 0800 138 3944) can at least provide a measure of support.    

For those who want to go a stage further, providing access to Chase de Vere’s financial education services is a highly cost-effective way of offering much more comprehensive guidance. If you would like to find out more about these services or to discuss any issues regarding employer or employee pension contributions, then please do not hesitate to contact Chase de Vere on 0345 300 6256 or complete this simple form and we’ll call you.