It is in most employers’ interests to ensure that employees can retire when they actually want to rather than cause havoc with succession planning by working far longer than originally intended.
So, providing useful guidance or advice on the levels of pension contributions employees need to make to secure a timely retirement involves a fair degree of enlightened self-interest. And Chase de Vere is well placed to help.
Unlike many of our competitors in the employee benefits field, we have an independent financial adviser (IFA) arm, and so can provide everything from generic workshops and seminars to one-to-one financial advice on these issues.
Furthermore, we are finding that, with inflation falling and the economy now emerging from recession, employees are becoming more receptive to guidance in this area than when the cost of living crisis was at its peak.
After all, if someone is struggling to pay basic household bills, suggestions about what they should be forking out to fund a life decades ahead tend to receive pretty short shrift, especially as some of the figures bandied about regarding necessary savings levels can seem alarming.
What do they need?
Fortunately, employees should not need retirement income equivalent to their full salary because life should prove less expensive. There will be no commuting costs and no need to buy clothes for work and, hopefully, the mortgage will be paid off and the kids will have fled the nest.
Concessions like free bus passes and medical prescriptions, and discounted prices at cinemas, theatres and other venues are not to be sniffed at either.
But employees generally tend to severely underestimate what they are likely to spend in retirement. Not least because they invariably live longer than they originally anticipated. According to the government, we should on average expect to be retired for 24 years – or a third of our adult life.
The other main issue is the failure to appreciate the size of pension pot they need to acquire to produce a worthwhile income.
We have often come across employees who arrive at our sessions feeling excited at the fact that they have accumulated £50,000 in pensions saving, only to leave disappointed in the knowledge that this may give them an income of around £1,500 a year!
There is no one-size-fits-all rule as to what anyone should be saving, but government guidelines can be a useful starting point for those still a long way from retirement, because they can provide a target to aim for.
The nearer an employee gets to retirement the more the targets they’ve set can be adjusted to reflect factors such as outgoings and responsibilities, inheritances received or income from sources such as ISAs or investment properties.
According to the government, someone earning between £22,400 and £32,000 is likely to need two thirds of this income in retirement, whilst someone earning over £51,300 is likely to need half of it.
So, even with the State pension currently worth £11,502.40 a year, most people should be aiming to build a private pension fund of several hundred thousand pounds.
Inadequate contributions
Unfortunately, this is most unlikely to be achieved simply by employees making the statutory minimum auto-enrolment contribution – which, according to our benchmarking research, 62% do.
We can explain the types of contribution levels they should be thinking of making to achieve their retirement goals and, depending on their attitude to risk, the types of investment strategies they should be looking to implement.
In practice, employees rarely hike their contributions significantly until they have reached their 40s and 50s – when they may have achieved a few promotions and started to find some outgoings reducing.
But we find that implementing a salary exchange scheme can be a good way of boosting pension savings earlier. With around 90% of such schemes we introduce the NI savings go into the employee’s pay, and when we point this out we find it relatively easy to get them to direct it into their pension.
If you would like to find out more about how Chase de Vere can help your employees with retirement funding then please don’t hesitate to contact us.
Content correct at time or writing.