Why a dual approach to pensions creates boost for employees under 40

Why a dual approach to pensions creates boost for employees under 40

Steve Watson, head of proposition, Smarterly A good financial wellbeing strategy is no longer just about workplace pensions. Nowadays it must take

Steve Watson, head of proposition, Smarterly

A good financial wellbeing strategy is no longer just about workplace pensions. Nowadays it must take a holistic approach to give employees the chance to save for life events from house buying to travelling the world. With a range of demographics within the workplace, employers must address the differing financial priorities and concerns of their employees with their financial wellbeing offering and a dual offering of a pension and other savings pots could give employees a much-needed way to save for more than just their retirement.

Recent research shows that millennials are looking for support for other major life events, like buying their first home; not just retirement. These pre-retirement needs must be addressed before they can think about the longer term. And a healthy pension pot that can’t be accessed before age 55 isn’t going to help them get there!

Placed in the context of Maslow’s hierarchy of needs, you can see why many employers battle with getting younger employees engaged with pensions. With the best will in the world, until their more immediate financial needs are met, millennials aren’t going to be that interested in planning for retirement which could be 30 or 40 years away.

 

Figure 1 – the financial priorities for millennials[1]

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But in the era of auto enrolment how do you successfully move the focus away from solely pension solutions to a holistic financial wellbeing programme? Simply by changing the focus from products to the needs of employees. As soon as you do this, unless you have an employee base with an average age of 50 plus, it’s clear that a pension scheme is only part of the overall solution.

The latest figures from the Office of National Statistics (ONS) show that auto enrolment has been successful at getting people into pension schemes but not necessarily engaging. Pension participation for the under 30’s has never been higher – now around 63 per cent – a massive jump from the 16 per cent in 2012. But this is primarily down to inertia – people not opting out – and when you consider this alongside the fact that pension contributions still hover around the minimum required levels, you see that this isn’t enough to support employees in retirement, let alone address the financial concerns of life events before they get there.

So how do you provide for the longer-term financial needs of all employees and at the same time meet their medium and shorter-term concerns?

A LISA bridges the gap

Many employers are now implementing or considering a dual approach to workplace savings, for example, a Lifetime Individual Savings Account (LISA) or other types of ISAs for older employees alongside a pension scheme.

Introduced in April 2017, a LISA can be opened by anyone under the age of 40 and receive a government top-up of 25 per cent, up to a maximum of £1,000 per year, until the age of 50.

Individuals can withdraw money from their LISA for buying their first home up to £450k or when they reach 60. An individual saving into a LISA from the age of 18 to 50 would be eligible for up to £32k of government bonuses. If they withdraw money for any other reason, they pay a 25 per cent withdrawal charge on the total amount.

As buying a first home is the top financial priority for many people under 40[2], the LISA is an ideal savings vehicle. If they continue to save into it for retirement, the bonus payments mean that a LISA is also a great way to save for retirement whilst still retaining access to funds if needed.

An approach that is proving successful with employers is a contribution split, where the employer offers the option to save into a pension and a Lifetime ISA with the employer contribution split accordingly (contributions to the pension scheme must meet at least the legal minimums).

Workplace savings are evolving beyond pensions

It’s clear that a ‘one size fits all’ approach to workplace savings is no longer enough and this needs to be reflected in the products available to employees. A good financial wellbeing programme isn’t just about retirement savings and pensions; it’s about taking a more holistic approach.

 

[1] Realigning the workplace savings offering to meet the needs of millennials – Smarterly 2019

[2] Millennials shun pensions — but why are they all property mad? Financial Times, 19 February 2016

 

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