How to help maximise overall pension savings

More than 9 million people have now been brought into some form of workplace saving, contribution rates are rising this year and in 2019, meaning potentially more money than ever before being squirreled away into someone's savings pot.

According to Aegon, April 2018's contribution hike from 2 per cent to a total of 5 per cent (2 per cent from the employer and 3 per cent from the employee) will amount to a "hidden £5bn pay rise". 

Provided opt-out figures remain at less than one in nine people, people will see their pension pots accumulate at a much faster rate from 2018 than they have over the past few years, regardless of the investment performance since 2012.

But is it enough?

It's certainly a start, but what more can be done?

Sean McSweeney, corporate advice manager for Chase de Vere, comments: "Our own research shows even baby boomers, who should be in the best position with regard to their retirement planning, ideally want to retire before the age of 65 but actually expect to retire close to age 70.

"In a world where employers cannot impose a default retirement age, this has huge implications for both the efficiency of the workforce and for succession planning."

The main drivers of good retirement options, however, remain painfully simple: save as much as you can, as early as you can. Tom Selby

He believes corporate advisers have a duty to convince employers the solution to engagement needs to be "more than just online tools", adding: "old-fashioned face-to-face and regulated financial advice can have an important role to play".

This is where some form of 'shortfall analysis' can come into its own, both with trustees and with individuals. 

According to Neil Adams, head of pension planning for Drewberry Wealth, providing regular shortfall analysis is one way in which advisers can help maximise clients' overall pension savings by providing an incentive to save more.

How should advisers advise?

For Mr McSweeney, advisers have a huge role to play in maximising employee outcomes. 

"Our first job is to help sponsors understand failing to address this issue could have massive implications for the employers' business," he says. 

But it is also important to help the individuals and encourage them to take more responsibility for their overall financial health in the lead-up to, and within, retirement.

We'd always advise contributing more than the minimum. Neil Adams

Matthew Connell, director of policy and public affairs for the Personal Finance Society, thinks the first thing clients should be advised to do is "start saving as early as possible", without putting all their eggs into one basket.

There are also other things he believes should be taken into consideration, such as the fact home ownership could still be a good strategy to help bolster pension income or a potential inheritance.

While holding large sums of money in cash, which is prey to the vagaries of inflation, Mr Connell believes clients would be well advised to "retain some savings in cash, which is capable of being used as an 'emergency' source of income".

He adds: "Also, help clients be aware of scams, and to steer clear of them.

"Fraudsters are becoming ever-more sophisticated, and adviser expertise can ensure someone's lifetime savings do not disappear."

Talk about tax

Too often people focus on the contributions or the investment performance, but the importance of the tax boost given to pensions while accumulating is not often discussed.

Mr Adams states: "Advising on the benefits of funding a pension, such as the tax breaks, is another crucial issue to take into account."

According to calculations from Aegon, for example, the 2018 automatic enrolment contribution hike, together with the tax relief, will make a significant difference to someone's retirement savings.

Example: 

• Assuming average earnings of £28,600 (according to Office for National Statistics).
• Salary offset of £5,867 (for 2017 to 2018 tax year) and £6,032 (2018 to 2019 tax year).
• Employee annual contribution: - £22,568 x 2.4% = £541.63 a year (£45.14 a month; £10.42 per week).
• Tax relief - 0.6% x £22,568 = £135.41 a year (£11.28 a month).
• Employer annual contribution - £22,568 x 2% = £451.36 a year (£37.61 a month).

Peter Glancy, head of policy development for Scottish Widows, agrees tax is a vital point of discussion. "Advisers can create significant value for pension savers throughout their pensions journey - both through accumulation and after retirement.

"This might include helping their clients make the most of tax incentives and, importantly, helping them form holistic financial plans, where pensions might be complemented with the use of Isas, cash savings, equity in residential property and so forth."

Contribute more than the maximum

As covered in previous articles in this guide, giving people some form of statistical evidence will help advisers back up the argument that paying more in early enough will help provide a better outcome in retirement.

Mr Adams comments: "We'd always advise contributing more than the minimum [as the minimum] is not likely to be sufficient to retire comfortably."

It is also advisable to help clients "make adjustments when their plans change from time to time", says Mr Glancy - meaning regular reviews might be in order both pre- and post-retirement to ensure the investments and the pension plan remains suitable to the individual's needs.

"Clearly", Tom Selby, senior pensions analyst for AJ Bell comments, "everything depends on the individual needs and aspirations of different clients.

"The main drivers of good retirement options, however, remain painfully simple: save as much as you can, as early as you can; make the most of the free money on offer - namely tax relief and matched employer contributions; and take advantage of long-term stockmarket growth, subject to your appetite for risk."

simoney.kyriakou@ft.com