The Government introduced pension schedule E Auto-Enrolment in 2012, ensuring that most people joining a company in the UK enrolled in their workplace pension scheme. These workplace pensions are indeed a very good thing and have worked very well. They require little thought from the employee and are compulsory for both employee and employer, meaning almost everyone in the Schedule E workforce’s default position is that they are in a pension scheme.
When most employees join their employers pension scheme and first thing they consider is their own and their employers contributions. Rightly so. Employers have to pay a minimum of 2% of their employee’s salary and the employee would typically pay 3% into the pension. That’s a total of 5% but many employers are more generous than that. “We’ve seen an average of around 11% of salary going into UK workplace pensions’ says Helena Wardle of Sterling & Law Independent Financial Consultants. “For someone earning say £40,000 per annum, that’s a significant £4,400 per year. Work for the same employer for ten years, and that’s £44,000 in pension contributions.”
The self-employed individual on the other hand would have to think for themselves. They would typically seek advice from a financial adviser before setting up a pension plan. Assuming the self-employed individual were to contribute the same amount, consideration would be given to several factors. The first would be their preferred retirement age and what they would need as an income in retirement. That would then be mapped back to a corresponding contribution recommendation, taking their affordability into consideration. Their attitude to risk and investment experience would also be taken into account. Finally, before recommending a retirement product provider, consideration would be given to factors such as flexibility, charges and their effect on fund performance. Just as important would be the financial strength of the recommended product provider. Once the plan was set up, the client and adviser would regularly review the plan, to ensure that they were on track to reach the individual’s retirement goals.
Back to employees. What surprises us about employees is how little thought they give to the pension scheme itself and how their money would be invested. Most employees simply accept the default fund, which could be anything from a low-cost index tracker to a UK growth managed fund. They then leave it there to do its thing, not bothering to consider how the fund was managed, the charges, volatility and risk. “Many employees are unaware that they have a choice. Some workplace pension schemes have a reasonably wide choice of funds within the scheme or may even allow you to set up a private pension outside of the scheme to which your employer could contribute, but many employees are none the wiser to these options,” says Helena.
Generally, workplace pension schemes benefit from economies of scale in terms of charges. But this typically comes at the expense of individual financial advice. Unless the sponsoring employer was prepared to pay for advice, the employee would lose out and many would have no idea how their money was invested. The variation in default fund performance between schemes is quite alarming. Being in a good place is more down to luck than judgement.
So, is it ok to base your retirement provision on luck? We don’t think so. We believe seeking financial advice should be the default position. There is no such thing as a free lunch and you may well have to pay for the financial; advice you receive. A price worth paying to take luck out of the equation? Your call.
