12 January 2021
Significantly boosting employees’ communication about pensions could be as simple as changing the language used to describe them.
A survey, by Invesco, Nest Insight and maslansky + partners, found some common misconceptions about pension savings, and identified the barriers when it comes to engaging with workplace finances.
Its five key findings were that:
- 40% of the survey participants were unaware they could choose how much they pay into a pension
- One in three participants thought AE contribution rates were the ‘recommended’ level of savings
- 68% of savers remain at the default saving rate
- More than half (52%) of those saving into a pension were unaware of government tax relief on contributions
- 33% weren’t aware that their employer also pays into their pension.
This research suggests people rarely think about how much they are saving, and many don’t understand their different pension options.
Policy makers and pension professionals can make simple changes, particularly in the way they communicate with savers, to increase these engagement levels.
The research recommends that all communication follows four basic principles, that it dubs ‘the four Ps”: positive, plausible, plain spoken and personal.
- Positive: Too often, messages focus on how savers are missing out, not what they can get if they act. ‘You can’ is more likely to engage than ‘you should’.
- Plausible: People are pragmatic. A credible presentation of the benefits of saving is more likely to connect than visions of a dream retirement.
- Plain spoken: Employees want to hear what they will get out, not what they put in. Outcomes need to be shown in pounds and pence, not percentages. An estimated income figure, rather than pot size, was found to be most helpful, enabling people to think about what lifestyle they will be able to afford relative to their current annual income.
- Personal: ‘You’ is more engaging than ‘us’. People are more likely to want to make their own choices if they know they are on a ‘default setting’.
If you really want to improve knowledge and understanding of pensions, it is beneficial to state in plain English that people can contribute more into their pension, they can make a difference to their financial security when they’re older by rethinking contribution levels and that the contributions made when younger, work harder for people. For maximum efficacy, these statements should be backed by concrete examples using pounds and pence.
Below, we will go over some pension jargon, to help you gain a better understanding of what it’s all about.
This is the maximum amount of pension savings you can get tax relief on each tax year. In the 2020-2021 tax year the Annual Allowance is £40,000, for most people.
A retirement income product that provides a regular income, either for life, or a set period of time.
This means employers have to enrol their eligible workers into a pension scheme.
Defined Benefit pension
This pays a retirement income based on your salary and how long you have worked for your employer. Usually, this is only available from the public sector or older workplace pension schemes.
Defined Contribution scheme
Your contributions, and your employer’s contributions, are invested in the stock market. This builds up a pot of money, the size of which will vary based on the amount paid in, how long it is paid in for and how well the investments have performed.
Also known as a Flexible retirement income product. This means you can use your pension to provide a regular retirement income. Although the income is not guaranteed for life, it allows you to change how much you take out, or to later switch the rest of your pension to a more secure retirement income product.
This is the highest value of pension savings you can build up before you incur a tax charge when you draw out your savings. For the tax year 2020-21 the Lifetime Allowance is £1,073,100.
Money Purchase Annual Allowance (MPAA)
This is triggered if you withdraw money from your defined contribution pension. It means you will usually only get tax relief on your pension contributions up to 100% of your taxable earnings, or £4,000, depending on which is lower.
Self-invested Personal Pension (SIPP)
This type of pension holds investments until you retire. It provides the same tax relief as other pensions. It is more flexible as you can decide what you want to invest based on your retirement needs.
This is the weekly pension payment you receive from the UK government when you reach State Pension age. The amount you receive is based on your National Insurance record.
Tapered Annual Allowance
Your Annual Allowance is reduced (‘tapered’) if your adjusted income goes over £240,000 or your threshold income exceeds £200,000.
Tax-free lump sum
You can usually take 25% of your pension fund as a tax-free lump sum.
Hopefully, you now have a better understanding of pension jargon and feel more confident about your pension fund. When it comes to pensions or otherwise known as retirement savings, make sure you do your research, so you can get the most out of your retirement.
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