A good financial wellbeing strategy is no longer just about workplace pensions, it has to take a holistic approach to give to employees the chance to save for life events from house buying to holidays. A dual offering of a pension and other savings pots could give employees a much needed means to save for more than just their retirement.
Introduced in April 2017, Lifetime Individual Savings Accounts (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 £4,000 per year, until age 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 have to 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 (1), the LISA is an ideal savings vehicle. If they continue to save into it for retirement, the bonus payments mean that a Lifetime ISA (LISA) is arguably a better value proposition for younger employees than a pension scheme.
In his latest article Michael Johnson, research fellow at the Centre for Policy Studies and an adviser to Smarterly, provides some compelling arguments as to why the Lifetime ISA should be expected to produce a larger retirement income than a pension pot for more than 90 per cent of all millennials and why he continues with a number of industry parties, to lobby Government to recognise a LISA as an alternative auto enrolment vehicle.
Until this happens, a dual workplace savings approach (Pension and LISA) is essential to effectively provide for the financial needs of all your employees.
Financial wellbeing is more than a pension scheme
When an employer introduces a financial wellbeing programme, they are in effect recognising that a pension scheme on its own is not enough. With a range of demographics and flexible working styles within the workplace, the employer must address differing financial priorities and concerns with their financial wellbeing offering.
All of us have major life events before retirement that, at the time take priority over pension savings. A healthy pension pot isn’t a concern for employees trying to save a hefty deposit for their first home.
Then there are employees affected by tapered annual allowance and unable to contribute their full entitlements to the pension scheme. There needs to be another savings vehicle in which excess contributions can be invested.
From product focus to a needs-based approach
With the existing auto enrolment approach combined with a massive employer pension contribution bill 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.
There’s lots of research that demonstrates for most of us major financial priorities are linear and so is our focus. We all tend to prioritise first home purchase, then marriage, then kids and finally retirement. It’s not that saving for retirement at a younger age isn’t important. It’s just not the most pressing need at the time.
However, the latest auto enrolment figures from the Office of National Statistics (ONS) seem to contradict the linear approach. 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.
Although inertia means many younger employees now have a pension, other financial priorities stop them fully engaging, at least until their other financial needs have been met.
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?
Many employers are now implementing or considering a dual approach to workplace savings, for example, a LISA (or other types of ISAs for older employees) alongside a pension scheme.
The application of this can vary depending upon the needs of employees. LISAs are only accessible to employees under the age of 40, but at the root of any design should be the recognition of a diversified workforce with diversified needs.
For higher earners affected by the tapered annual allowance, this dual approach would see contributions up to their maximum allowance (or capped at £10,000) being paid into the pension scheme but the remainder paid into a LISA or for those over 40, an investment (stocks and shares) ISA.
Employees with any form of pension protection shouldn’t pay any further pension contributions. Rather than lose their entitlement to employee pension contributions, the dual structure could see 100 per cent of contributions being paid into a LISA or investment ISA.
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).
It’s clear that a ‘one size fits all’ approach to workplace savings is no longer sufficient 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 a holistic approach.
(1) Millennials shun pensions — but why are they all property mad?, Financial Times, 19 February 2016