March 2008

Saving for the future

Another week, another survey about how people are not saving enough for their retirement. This time it's the turn of the young (under 34-year-olds) to come under the spotlight in a Department for Work and Pensions (DWP) survey.

Apparently, young people today are expecting to be able to afford a retirement jam-packed full of satellite TVs, gym membership and foreign holidays. However, they are not actually saving anything – or very little - for this idyll. Encouraging people to save is a thankless task. They might appreciate why they have to do it, but retirement can seem a long way off, and the amount of money needed to achieve a decent income can seem very steep. Especially when you don't earn very much, and are on a tight budget. Of course, the answer is 'take baby steps'. Start off saving what you can, get in the habit, and build it up from there. Salary sacrifice and bonus sacrifice can be excellent ways to help people get on this road to reform. The first few months of the year can be the time people receive a salary increase or a contractual bonus. People have never received this money before in their pay packet. Asking someone to start saving more by giving up some of their take-home pay, can feel like a pay-cut but saving the money someone has never 'received' before can work.

The beauty of both salary sacrifice and bonus sacrifice is that they are very tax-efficient ways of making additional pension contributions. Under a salary sacrifice agreement, employees agree that their employer will pay part of their salary directly into their pension schemes. This could be any new salary increase for the employee.

The sacrificed amount is no longer being paid as salary, and the employer is no longer required to pay their 12.8% national insurance contribution on this amount. So, this could be added to the employer's pension contribution at no additional cost to the employee or employer, boosting the overall contribution even more. Salary sacrifice and bonus sacrifice are fast becoming popular ways of paying pension contributions. A recent survey by the Chartered Institute for Personnel and Development (CIPD) showed three in ten employers now operate a salary-sacrifice arrangement, and of a fifth of employers who plan to make changes to their pension plan this year, 31% of them are introducing a salarysacrifice scheme. The survey also showed salary sacrifice is more common in larger employers and those with a younger workforce. Employers obviously see the wisdom of helping young people to start saving as soon and as painlessly as they can, and recognise these arrangements are a good way to boost take-up rates and levels of contribution.

The area of encouraging saving through the workplace is continuing to evolve. The CIPD survey showed that 4% of employers operate a Save More Tomorrow plan (an idea borrowed from USA), which allows employees to commit beforehand to save a proportion of any salary increase into their pension.

Saving is difficult. For the vast majority of us it means giving up something today and that can be tricky when all around you seem intent on enjoying their lives but just because it's difficult doesn't mean we can ignore it. Saving needs to become part of the UK culture, and we need to find ways of making it as painless as possible.

Rachel Vahey
Head of Pensions Development
AEGON Scottish Equitable