We quizzed financial advisor, Jonathan Kinch, on work pensions and the new auto-enrolment scheme. He explains why it is so important and how employees will benefit from it.
Why is auto-enrolment so good for employees?
It means there will be more money in the pot when they retire. In the past people waited until 30-35 until they started to plan their pension but now almost everyone will be enrolled from the age of 22. For younger people especially, the cumulative effect of saving in a tax free growth environment over a long period is extremely positive.
What’s the story in the bigger picture?
While it will likely take a generation, it will become second nature for everyone to start saving at an early age. This is already the case in other countries such as Australia. People will have more control over their long-term future, rather than having a greater reliance on the State, which is very important given the pressure that any government will be under with a growing and ageing population.
What choices do employees have when it comes to their pension?
The employer will set-up and run the pension scheme. Most allow payments to be made via salary exchange, which means an employee’s pension payment is made from gross salary before income tax and National Insurance (NI) has been deducted. This is preferable for the majority of people and is more tax efficient than paying into personal pensions because you don’t pay NI on the pension contribution.
Within the employer’s scheme there is usually a choice of funds which vary in risk level. If you don’t take advice or choose a fund your money will be placed into a ‘default / lifestyle fund’.
I typically advise people to join and participate in the scheme on offer via their employer no matter what type of pension it is, because if or when they move on in the future the pot can be transferred. But advice should be taken to find the best solution.
Is it wise to also have a personal pension?
It is more tax efficient to make payments into a company pension scheme via payroll (on a salary exchange basis). However, throughout a typical career, people will work at more than one company, so it is likely that a trail of pensions will accumulate over the years. It is usually possible to transfer the old company pension plans into a personal pension, but we recommend that a review is always conducted to assess the merits of retaining/moving.
A good quality personal plan can offer access to a much wider range of investment funds as well as increased flexibility when it comes to accessing money (post age 55) as well as how money is passed on to o beneficiaries in the event of death. Most personal plans now have enhanced online access and it is possible to access all of these features at very a competitive cost.
Can employees use a Financial Adviser to plan a pension?
Yes, although their firm may have already engaged with an adviser especially if they have been able to put in place a good quality group personal pension. The cost of advice may well be covered by the firm, so that should always be investigated. Any external advice is unlikely to be paid for by their employer.
How can a Financial Adviser help?
By using an independent financial adviser they ensure the most appropriate plan is used based on an individual's requirements. This would be coupled with advice on how much should be placed in a pension, taking into account affordability and tax status. Then, very importantly, how this money should be invested depending on attitude to risk, capacity for loss, and other considerations such as ethical views.
As someone’s career progresses and earnings change they may require updated advice. It’s common for people to change jobs these days and we can give advice on how best to manage pensions accumulated from old jobs.
Lastly, we help people wind down or stop work altogether by advising how their pension and (hopefully) the other investments that have been built-up can be used to replace their earnings to fund their retirement.
Jonathan is a Chartered Financial Planner at Fairstone Financial Management City Ltd. With 14 years experience, he provides advice around a wide range of areas, such as pensions, investments (ISAs, Bonds, Trusts, & Enterprise Investment Scemes) and protection (life insurance, critical illness cover, etc). He meets his clients yearly as part of an on-going service to ensure their financial plan is taking into account any change in personal circumstances and objectives, as well as changes in legislation, the economy and investment markets.
Fairstone is one of the largest Chartered Financial Planning firms in the UK. It currently has over £8billion in assets under management, a 5 star Defaqto rating and over 400 advisers across the country, supporting over 40,000 clients across the full range of financial services.