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How the new pension scheme should not be called “auto-enrolment” but should be called The Magic Money Tree!

Posted on: 01 Aug, 17

We’re all getting older and living longer – so time to get saving for retirement! But what does that mean for employers? Oury and Clark are debating the pros and cons once again.

Oury, this is rather random, but I was I was reading an article about some of the more memorable quotes from the last election campaign, you know “strong and stable”… “coalition of chaos”… “there isn’t a magic money tree”… and it got me thinking about whether there could be such a thing as a “magic money tree”.

Clark says...
Oury says...

You’re such a dreamer Clark, there isn’t and will never be such a thing… other than in the mind of fantasists…

But think about it, with the introduction of the government’s workplace pension scheme, almost all workers are being made to contribute to this scheme, which means when they retire, they will in effect have a “magic money tree”.

Clark says...
Oury says...

Hmmm – on the surface maybe, but you need to look a bit deeper. The government introduced the scheme primarily as a result of the 'PERFECT STORM' brewing in relation to state pensions. I mean, we're living longer and with an ageing population, none of us are going to be able to enjoy the comfortable pension of our parents and many baby boomers, so the government has taken steps to try and prevent mass pension poverty for us all later in life. Or to put it another way - the government can’t afford to look after us in the future when we are old – so businesses and individuals need to do it for themselves.

So this is what auto-enrolment is??

Clark says...
Oury says...

Yes - it is an extremely confusing name - definitely in need of a rebrand! Apart from the fact they have named the new pension rules after the process of how you will be enrolled into it… i.e. automatically… it is not actually automatic! The business needs to set up and enrol by their staging date - and get help to do it. And furthermore while it’s mandatory to set up a scheme, and enrol all employees, - employees can opt out – and do their own thing.

Oh so you can opt out?

Clark says...
Oury says...

You can – and in some circumstances you perhaps should – BUT your employer can not incentivise you in any way to do so – so don’t think you can opt out and ask for the cash instead…

Damn… Okay - But if you don't opt out and you pay in over your working life, then isn't it a bit like a "magic money tree" when you retire?

Clark says...
Oury says...

It's a start, but it's not the only thing people should be doing. Really, every one of us should be putting aside at least 15% of our life-time earnings into our pension to try and avoid future pension poverty. So much of it is dependent on how old you are and whether you have been making any provisions at all for your future. You know over 25% of people in the UK who are aged between 55 - 64 don't have a private pension and this figure rises to 42% across all age groups. There is going to be a massive issues with pension poverty in the future.

Life-time savings

The one saving grace for individual's in the 55 - 64 year old age group is where they own, or almost own their own homes. The equity they have built in their homes will likely be the one thing that saves them going forward. But the situation is really different for young people who can't afford to even get on the property ladder.

Yes it does seem rather unfair that the best tax reliefs (0%) on assets there is only applies if you own your own home (Private Property Relief)… that’s tough for people without the bank of mum and dad to get on the ladder. What other asset can you accumulate tax free over your life? None! Really to be fair, people should be able to accumulate any asset they choose on the same basis to make it more fair for everyone…

Clark says...
Oury says...

Well quite – but we are where we are. Now the workplace pension scheme will rise to a minimum contributions at 8% over time (this includes employer, employee and government tax relief), but unless you are lucky enough to be very young now when this is being introduced - more is needed… and you are right sadly owning a home has become a bit of an exclusive club…

Dow Jones industrial average stock market index for the last 100 years

So why is everyone not taking steps to increase their contributions to their future pension then? This is tax efficient?

Clark says...
Oury says...

I think the key issue is lack of awareness and competing priorities. I mean most young people who have been to university end up with huge debt around the £50k mark by the time they finish their degree; many are focused on trying to save a deposit to try and get on the property ladder, and many just struggle hand-to-mouth on a monthly basis and simply don't have spare cash to put aside. Also we have apparently reached peak stuff … meaning that people now prefer to buy experiences (doing stuff… like going to a festival) rather than stuff (house, car, etc… )

Going to a festival

which means that people aren’t thinking about assets to hold and tie them down to specific places, but are just living in the moment… moment to moment… captured in every selfie… place to place… “citizens of the world”… free to roam and experience and believe… that maybe Brexit won’t happen…

Oury! We said we are not going to mention that word anymore!

Clark says...
Oury says...

Yup sorry – you know I just get carried away…

So why then aren't employers taking more positive steps to promote the benefits of the new pension regime?

Clark says...
Oury says...

For a start, employers are mostly doing their best in a very difficult place. There will always be a gap between understanding what it’s like to be an employer and an employee. employees do not accept financial risk from their employment, and at the same time would like to be given a shareholding, and have all their rights protected… yet there are many businesses where the employer is earning less than the employee and not even sleeping nights… this combined with an increased Millennial perspective - that is, that the employer should be grateful for its employees and not the employee grateful for their job it’s tough… Even though employers are required to offer a pension scheme, if they choose to contribute just the minimum of 2% (1% employer, 0.8% employee and 0.2% tax contribution) this is tough on top of all salaries AND employees think they aren’t appreciated enough… that their employer doesn’t really value them. It’s a sensitive matter, and you need to be very positive about it and maybe go a 1 or 2% above base requirements - so that you aren’t doing the minimum!

Really you think employers are not at fault… and are doing what they should…

Clark says...
Oury says...

Well kinda - I do not think it’s fair, this view some have that employers’ don’t care about their employees at all, they care a lot - but at the moment they are just getting their head around the upside benefit – or if you like the “social obligation” to provide for the future, that has been thrust on them by the government… I mean employers have always had to offer an occupational pension scheme which most employees turned down, instead opting for cash. Everyone just wanted money now, not honey tomorrow…

Of course, I hadn’t thought of it like this. Now as I understand it the statutory obligations kick in when you have just 1 employee but I guess this message has just not got through to businesses. I wonder if they are aware of the potential fines for not complying?

Clark says...
Oury says...

They should be! Overall there is a combination of apathy, lack of awareness, part trying to keep their heads above water and they likely see these pension schemes as bringing more red tape to their already overburdened businesses, but equally (or more likely) the employee hasn’t got their head around it either. There’s a huge investments of time required on both sides to understand it, understand how to handle it, and understand what is the right thing to do. You can’t just introduce it, each employee needs to understand it… Younger employees just see the money coming out of their pay as an extra Tax without really understand what it's for;

Okay but the schemes are pretty simple to set up I believe?

Clark says...
Oury says...

Yes it’s fairly straight forward… you need to do a review as a business and pick a scheme – and then the initial obligations start at 1% for the employer, 0.8% for the employee, 0.2% tax relief for a total of 2%. This will gradually increase to 8% total by April 2019, with the employee having to make the bigger contribution (5% vs 3%). Both the employer and the employee can contribute above the statutory minimum amounts.

Okay doesn’t sound too bad - and what are the tax benefit from both the employer and employee perspective, as maybe if people understood this better, they'd see the advantages?

Clark says...
Oury says...

All employee payments to the pension scheme are made tax free, so you are getting more bang for your buck… and employers’ pay slightly less tax on paying you, plus the costs of setting it up are tax deductible.

On this basis, is there any additional benefit in people putting in more, for example by asking their employer to pay in a part of their bonus into the pension scheme if they get one?

Clark says...
Oury says...

Yep, there is. If the employee gives up some / all of their bonus in exchange for a pension payment from their employer, they avoid paying tax (and NI) on the bit they’ve given up which is helpful… the downside of the pensions is sadly you do pay tax on your pension fund money when draw it out in the future just like it is earnings… but often you pay lower rates of tax in retirement than you do when you’re working as you earn less…

The key is to understand that the way we are taxed in bands, means that there are some levels of earnings that are very inefficient. For instance - for every £ you earn above £100,000 and below £123,000 you are being taxed at 60%… so there are situations where you would be much better to put any earnings in this bracket into a pension scheme … to save this extortionate tax rate - and draw the money at a later time, when your tax rate will likely be lower…

Okay got it - Are there any exceptions to having to pay into the scheme?

Clark says...
Oury says...

There are, particularly if you have staff working in the UK for a temporary period. There is no real point (although legally the employer can’t really say this) contributing for a year or two to a UK pension scheme if you are then going to leave the UK and have to transfer the money out of the UK. There are mechanisms to do this between some countries and the UK- but there are charges incurred. What makes much more sense is to opt out of that scheme and see if your overseas home scheme is listed as QOPS (qualifying overseas pension scheme - See here https://www.gov.uk/government/publications/list-of-qualifying-recognised-overseas-pension-schemes-qrops/list-of-recognised-overseas-pension-schemes-notifications and seeing if you can get your employer to contribute to that. They need to do it under a modified PAYE scheme but you will get the tax relief on their contributions, and then when they go home the money is where you need it… Of course, there are some local exceptions as well where perhaps you have your own personal pension scheme and you wish to continue to build that because you are more up to speed with what you are doing, and like to pick your own shares…

And can you move your pension if you change employer?

Clark says...
Oury says...

Yes, you can move pension accounts to another UK pension plan … and to be honest there are a lot of options if you start getting into it, where you can start enjoying the money building up…. It may feel like if the stockmarket crashes you could loose it all… but provided you are looking to save over 30 years… there is just not a time in history where the markets have not gone up significantly over this time…

Dow Jones industrial average stock market index for the last 100 years

Even if you take the highs of 1929 and 1966… when you go 30 years into the future you are up on your money again…

So really, on the balance, there is nothing but positives here…

Clark says...
Oury says...

Well you need to see through the negatives, because it’s about change - and no-one likes change - but yes it’s a positive thing. BUT it's really important people of all ages spend a bit of time working out to see if they can contribute more as we drive to reach that 15% of lifetime earnings… and it’s good everyone is being forced to think about it. Younger employees should really be encouraged to think about the benefits of starting their pension savings now and while for them retirement might seem like a life time away, it comes about all too quickly! AND some prudence now, should pay big dividends in the future.

Ah, I am now starting to see the "magic money tree" and a happy life on a beach on the future, but it won’t be without a few sacrifices now…

Clark says...
Oury says...

Yes first things first, the government should change the name from “auto enrollment” to “magic money tree” and maybe we would all see the positives a bit more clearly!

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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