Younger employees who previously used salary sacrifice to purchase gadgets may not be keen to switch to pension saving but, says Darren Hedgley, working through all the benefits could help change their opinion.
Cast you minds back beyond the Spring Budget to last November when Chancellor Philip Hammond’s Autumn Statement heralded changes to the salary sacrifice scheme that will be introduced from next month.
Tax breaks for smart phones and iPads will be removed, but support for pensions, cycle to work schemes and childcare will remain. Back in the 1970s, Margaret Thatcher, who was Education Secretary at the time, was labelled the ‘Milk Snatcher’ when she removed free milk for the under Sevens. Now – in addition to a few other names he has been called in the last week – Hammond could be labelled the ‘iPad Nabber.’
While Thatcher was vilified for her decision, however, it may be the Chancellor will be hailed a hero for having potentially done savers – and especially younger ones – a huge favour. By removing the ‘sexier’ salary sacrifice options, he may have created a major opportunity for employees to use their financial heads more and their joysticks less.
For businesses, this could also be a fresh opportunity to communicate the benefits of workplace savings and pensions – something urgently needed to address what is fast turning into a pension crisis.
Last September, research from PwC showed that while people may want a retirement income of £22,200 per year, without greater incentives to save, this is unrealistic. Many will face a £4,000 per year shortfall between their pension savings and desired retirement income.
PwC also found that six out of ten people are put off saving into a pension because they do not understand the pension system – a figure that is even higher for women and younger workers.
Another report, The Cost of Tomorrow, from the Tilney Group suggests the vast majority of over 45 year olds believe they will either improve (36%) or maintain (48%) living standards in retirement – yet the evidence shows they are underestimating their retirement budget by almost £100,000.
Still, let’s really look at the iPad vs Pension dilemma and the pros and cons for employees:
* Cost: An iPad will cost £600 a year, whereas a pension will cost up to 5% of earnings until retirement (the current auto-enrolment minimum from April 2019). The iPad wins
* Employer assistance: The government has made it compulsory for employers to pay into employees’ pension funds, thanks to auto-enrolment. The pension wins
* Payment period: It takes just 12 months to pay for an iPad, as opposed to 40 plus years for the pension. The iPad wins
* Instant gratification rating: For younger employees, pensions are in the very distant future. Clearly the iPad wins hands down here
* Salary sacrifice benefit: A salary sacrifice iPad will not be available after April 2017, whereas the pension will still be tax and National Insurance free. The pension wins
* Shelf life/Longevity: The iPad will last three to four years approximately, before becoming relatively obsolete, whereas the pension will last a retirement lifetime. The pension wins
* Cool rating: iPads are cool; pensions just aren’t. The iPad wins
* Delivery of benefit: Yes, iPads come in a nice box but pensions have also had a makeover in recent years and there are several options now available for people from the age of 55. They can choose to take a 25% cash lump sum (tax-free) and could take remaining sums intermittently or monthly, allowing complete flexibility. The pension wins
* Future financial benefits: Zilch for the iPad. Very promising for pensions with minimum combined employee contributions set to rise over the next few years to 8% and hopefully further after 2020. The pension wins
While many younger employees who had previously used salary sacrifice to purchase smartphones or tablets may not be keen to switch to saving towards their pension, working through all the benefits could help to change their opinion. Once an employee understands how salary sacrifice directly benefits them, it becomes truly valued.
Darren Hedgley is an associate director at Punter Southall Aspire
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