Not all pension schemes can provide the tax relief benefits members expect or indeed are entitled.
There are two methods to evaluate and TPR describes them as:
As you can see these arrangements affect lower and higher paid members in different ways.
This means the tax relief method can affect how much it costs a member to contribute.
That said, arguably relief at source is the safer option to recommend as it results in every employee receiving some form of tax benefit.
Advisers should note that TPR expects members will be provided with clear, accurate and relevant information about how they are affected and whether they need to take any action.
All of these exclusions and tax issues raise moral, legal and suitability questions that I am sure most advisers and employers may wish to avoid.
Therefore, while not the cheapest option in the short term, it could be argued that the fairest option is not to use the exclusions.
Is saving 8% a year sufficient?
In short, for most people - no - and the following graph illustrates this.
We have projected forward over 50 years a salary growing by 2.5 per cent a year, with pension contributions equivalent to 8 per cent a year (paid monthly).
The assumed fund charge used is 0.75 per cent (deducted monthly) and there are no other charges.
The fund annual net growth rate is 5.5 per cent a year.
The objective is to ascertain how many years of contributions are required to create sufficient capital to purchase an annuity equivalent to 60 per cent of salary.
We have used an annuity rate of 3.25 per cent.
When considering these figures remember most of us can expect a working lifetime of 45 to 50 years.
Illustration of contribution rate sufficiency
Summary of finding
From this we can clearly see that 8 per cent is unlikely to provide sufficient income for many and that saving a greater amount is likely to improve the standard of living in retirement.
That said, suggesting an employer pays in more than the statutory minimum is not an easy conversation.
However, we suggest advisers look to evidence the additional annual cost compared to having an elderly and arguably less productive workforce in the future who cannot afford to retire.
Something, I am sure most employers will wish to avoid.
The good news is that default fund annual management charges (AMC) are capped at 0.75 per cent - which is easy to understand and explain.
In addition, it is cheap compared to many other solutions, such as group stakeholder and group Sipps.
Although there may be other charges and so careful analysis is required because costs are not always obvious.
In the FCA consultation paper 19/25 (July 2019) entitled Pension transfer advice: contingent charging and other proposed changes it is proposed that workplace pension schemes should always be considered in the advice process.