Profile Pensions has investigated how employer contributions to pensions vary based on industry and gender and which sectors offer the best pension planning with high contributions from employers.
The Best and Worst Industries for Employer Contributions
The financial and insurance industry has been revealed as the most advantageous option for obtaining support. Although, as a sector renowned for its remunerative staff benefits, it’s no surprise that employer contributions are at an average of 9.5%. The education industry also fares very well in terms of pension options, with teachers receiving a rewarding 9.3% average contribution. This is followed by the electricity, gas, steam, and air-conditioning supply industry, however, this is significantly lower than the prior two with average contributions of only 7.1%.
At the other end of the scale, agriculture, forestry and fishing jobs offered the minimum legal contribution of just 2%, making it them worst occupations for creating a satisfactory pension pot. As an industry which is also climate dependant, this further defers individuals seeking a financially secure retirement after an unpredictable career. The accommodation and food services sector received a similarly low employer contribution of just 2.1%. While the arts and entertainment industry had the third lowest employer contribution, where it reaches only 2.5% on average. Although as a notoriously competitive industry, it’s anticipated that employers can get away with such a low contribution and a major factor to consider when navigating the risky world of entertainment.
Not All Pensions are Created Equal: The Gender Gap
Gender stereotypes still exist across industries with men receiving an overall higher contribution rate than women, at 4.6% compared with 4.4%. Education, as a female dominated industry, was the only industry where women outperform men in terms of employer contribution, where they receive 1.4% more annually. These high pensions also mean that teachers are likely to fare better in retirement than those in typically high-earning careers like real estate or finance. In technical areas, men acquired higher contributions and in the electricity, gas, steam, and air-conditioning supply industry, men had an employer contribution of 7.4% compared with 4.2% for women.
When looking at the gender differences, it’s clear an effort to increase the employer contribution in the male permeated professions should be made in order to incentify women to pursue these types of careers. Generally we know women are more likely to have lower incomes and more interrupted careers as a result of their caring responsibilities. Ensuring the pension contributions doesn't penalise them is as much of an organisational culture issue as it is a government policy issue.
Interested in Better Contributions? Here are the Jobs and Salaries Available in These Generous Sectors
We have crunched the numbers on the jobs available and average salaries for the most generous industries. The education industry has 102,805 jobs available in the UK, making teaching the most in high demand profession. When combined with the competitive employer contribution, it’s one of the best options for graduates seeking stability when finding a job and creating a secure retirement package. On the other hand, the administrative and supportive services sector has the lowest average salary bracket, equating to only £544 in contributions each year; an unattractive choice in terms of wages both during and post career.
The mining and quarrying industry offers the most enticing average compensation for it’s workforce with an annual salary of £39,51, although has only 2404 available positions in the UK each year. Similarly, the agricultural, forestry and fishing sector has an average income of £29.451. However it has the fewest number of jobs available and lowest employer contribution compared to any other industry, making it a very risky option in the long term.
Research from Profile Pensions finds which industry’s employers offer the highest level of contributions – that is, how much they pay into pensions as a percentage of salary, including how that differs by gender.
No Tension Pensions
With a target pot of £38,000 to live modestly in retirement, and £247,000 to live comfortably, retirement planning is a crucial financial consideration across all industries. These sectors, however, offer the best pension planning with high contributions from employers:
- Financial and insurance work – With employer contributions of an average of 9.5%, finance is the best industry for getting support – and with an average salary of £30,403, it’s one of the best-paying options around. With 54,446 jobs on the market in the UK, there are a lot of opportunities going around.
- Education – Teachers are among those with the best pension options, with average contributions of 9.3%. The average salary of £22,146 means those contributions reach an average of £2,053.60 annually. Teachers are also in high demand, with 102,805 job openings available.
- Electricity, gas, steam, and air-conditioning supply – Significantly lower than the prior two industries with average contributions of only 7.1%, this industry’s £23,943 average salary only results in contributions of £1,703 – though this is still among the top options.
At the other end of the scale, however, agriculture, forestry and fishing jobs offered the minimum legal contribution, 2%, when the ONS statistics were last published in 2018 prior to the April 2019 rise. While it’s scarcely more in accommodation and food services, at 2.1%. The third worst is the arts, where it reaches only as high as 2.5% on average.
The Gender Gap
While overall there was a slightly higher contribution rate for men than women – at 4.6% compared with 4.4% - in individual industries the range varies significantly.
The average difference in industries was marginally in favour of women, though only by 0.1%. Education, in particular, favoured women, with an average employer contribution of 9.3%, while men received only 7.9%.
In technical areas, however, men saw higher contributions. In electricity, gas, steam, and air-conditioning supply, for example, they saw 3.3% higher contributions, at 7.4% compared with 4.2%, and in manufacturing, there was a difference of 0.9% (5.3% to 4.4%).
Michelle Gribbin, Profile Pensions’ Chief Investment Officer, said: “The difference between industries is remarkable. While some you might expect, like financial and insurance industries, the high pensions in education mean teachers are likely to be better off in retirement than those in typically high-earning careers like real estate or logistics. Providing an interesting consideration for both employers and employees.”
“As for the gender differences uncovered, this is just another example of the gap between genders in the workplace, this time played out through pension contributions.
Generally, we know women are more likely to have lower incomes and more interrupted careers as a result of their caring responsibilities. Ensuring this doesn't penalise them is as much of an organisational culture issue as it is a government policy issue.
Firms should really start to get to grips with the fundamentals and fully adopt a policy of 'equal pay and pension contributions for equal roles', applied to both full time and part time workers. As a further step, firms regularly reporting on gender disparities in income and pension contributions really helps ensure good transparency and commitment on this issue.”
These days, financial stability really sounds like an elusive subject. We indeed have bills to pay, and a life to lead. But, if we don't take a seat, analyze, and create a financial bucket list, then we risk living within the shackles of our obligations. Here are eight financial tips that can help anyone secure their financial future and enjoy financial stability.
Create a passive income
Financial stability is a result of hard and creative work. And if you want to enjoy it, then you need to get creative too. That said, we cannot always control our expenses and bills, but what we can actually control is how much income we realize. Generating more revenue to offset any financial obligations one may have been an excellent way to go. A passive income is any income you generate from a job or task you are not actively working at. There are many ways to get this done, and the most popular ones are through websites, rental properties, small online businesses, freelancing, online trading, and affiliate programs.
Live without debt
Debt is one of the many obligations capable of ruining anyone's shot at financial stability. If you are still living in debt, it is almost impossible for you to be stable financially, let alone secure your financial future. Do you have credit card debt, personal loans you are paying off, or mortgage to attend to? All of these are going to hinder you from leading a financial future and becoming stable financially. Hence, you have to be rid of any debt you may have before you look to become stable financially because, without that, financial stability will continue to elude you. There are different ways to tackle one's debt, depending on the terms and duration of the debt. From the traditional debt consolidation method to the highly effective IVA scheme, debt of any kind can be addressed and resolved.
Create a 3-month emergency fund
Whoa, that's a lot of money! Once you are done breaking the shackles of debt around you, the next thing is to start preparing for the future. And a 3-month emergency fund would be a great place to start. Emergency funds are there for the rainy days, which is why you need to have one today if you really want to enjoy financial stability. Think about it, instead of going to get a loan to deal with an unforeseen event; you can dip into your emergency funds.
Open a money market account
Preparing for the future doesn't necessarily mean preparing for the next few decades ahead; instead, your future could be tomorrow. And if you don't have a robust financial platform to rely on, you may find it absolutely difficult to attend to your existing financial obligations and emergencies. In that light, having a money market account is another vital requirement for anyone interested in experiencing financial stability. A money market account is quite similar to a standard savings account, albeit with higher returns and better access to your money. Checking with your local bank is a great way to research the ideal account for you.
Create a vacation account
The best time to visit your dream country is while you are on holiday. But how many people can fulfill this dream? And how many of those who eventually achieve this do so without getting into debt? Don't be one of them! Visit your local bank and create a separate account where you can stash little cash every month for your next vacation so that your next holiday wouldn't break the bank.
Improve your Credit and FICO Score
That you don't run a business today doesn't mean you may never be entrepreneur, and the fact that you have some cash in your emergency funds doesn't mean you will always be able to resolve every financial emergency that comes your way. Hence, it is always great to have a good Credit and FICO Score as you never can tell when you might need to obtain funds from external sources to either finance your big business idea or resolve your unforeseen emergency. Your FICO Score determines what sort of risk a future creditor is willing to take on you. Having a high, and above 700 FICO Score is quite feasible if you pay all your existing debt as at when due, keep credit card balances low, and pay your bills on time.
Have a retirement plan
Start saving for retirement today with a 401k or an IRA plan. You should talk to your financial advisor to determine which plan is best suited to your needs.
Authored by Uday Tank.
Uday Tank has been working with writing challenged clients for several years. His educational background in family science and journalism has given him a broad base from which to approach many topics. He especially enjoys writing content after researching and analyzing different resources whether they are books, articles or online stuff.
Identifying this comprehension gap, urging Millennials understand the gravity of today’s decisions on tomorrow's financial future, pensions experts, Profile Pensions, have researched average millennials spend and compared it to the government provided State Pension, revealing a concerning £1000 per month difference between the two monthly incomes.
Spending an average of £1770 a month, including living expenses, social activities and simple pleasures, the reasonable spend amount is still 142% more than what would receive if they only have the £731 State Pension to rely on.
With rent alone coming to 118% of the State Pension, even if millennials are to cut out all luxuries from their spend, such as Netflix, take away and nights out, the total spend of £1318 further raises the alarm bells that the State Pension is unsustainable.
Though, with the help of the Workplace Pensions Scheme and early intervention, little sacrifices can mean a world of difference for your future self.
The pension provider offers tips to both help slightly cut costs and take advantage of the scheme to maximise your benefit.
Take advantage of your company’s workplace pension scheme
Due to auto enrolment, you’ll be saving a minimum of 8% of your salary per month towards retirement. Comprised of a 5% deduction from your pay and a 3% employer contribution, the 3% employer contribution is money you will not otherwise receive that is added to your pension pot for your future self. The 5% you contribute provides added tax relief.
Be proactive and make sure your scheme is best for you
As with many things, the default option may not be what’s best for you. Looking at your pension plan now could make a considerable impact . Most workplace pensions
Cook for yourself, rather than take away
It’s a 101 saving tip but choosing to cook for yourself can be one of the easiest ways to cut costs. The average amount spent on groceries and takeaways together equals over £300 a month, by trading Deliveroo for Tesco, you could be putting aside as much as £110 a month towards your pension.
Enjoy nights out but be savvy about them
The average monthly amount spent on nights out is equal to 32% of the full state pension. While enjoying yourself while your young is important and this is an expense you’re likely to pay less in retirement, spending less while you’re out, considering cheaper options or just staying in a little more can cut costs in half and save you £100 a month to go towards your private pension pot.
The full study, including a full breakdown of expense, is available at Profile Pensions.
Life expectancy may have stuttered over the past two years, sitting at an average of 85 for people over 65, but as populations continue to grow and live for longer than ever, it has never been more important to make correct and informed choices about how our assets will last the course.
Here, Tony Duckworth, MD and Chartered Financial Planner at Cowens Financial Architects, discusses how we can safeguard our precious pension pots through sound financial planning.
It’s no secret that state pensions aren’t enough to cover most people’s plans for their leisurely retirement years. The push on the need for private savings from the government and the introduction of the compulsory work-place pension in light of these ever-increasing age stats have further heightened the pressure on working people to get their finances in order. The good news is, it’s never too late to start putting the wheels in motion to build a portfolio of assets designed to meet your future financial needs, while also ensuring loved ones are protected should the worst happen.
The introduction of Pension Freedom in April 2015 means that anyone over the age of 55 can now withdraw their hard-earned private pot as a lump sum, paying no tax on the first 25%. This move, although liberating for many soon-to-be retirees, has opened a labyrinth of options and potentially wrong decisions.
Recent research from the FCA (Financial Conduct Authority) has found that around 100,000 over 55s withdraw money from their pensions every year without seeking financial advice[1], something the organisation is campaigning hard to change. It’s difficult to imagine that this many people have got to this point without any sound advice.
Recent research from the FCA (Financial Conduct Authority) has found that around 100,000 over 55s withdraw money from their pensions every year without seeking financial advice.
Having a comprehensive financial plan with a clear strategy to deliver to your retirement needs is key to understanding the best way to maximise your pension freedom. A Ferrari may seem a fantastic idea within the first week of your new-found retired lifestyle, but in many cases, your pension pot will have to last for almost as many years as it took to save it and a purchase like this may put too much strain on your pot to meet your needs for the remainder of your lifetime.
Care must also be taken when looking at annuities, although well-advertised as a sensible alternative to withdrawing lump sums of your pension, exchanging your pension pot for a monthly income is irreversible, holds little flexibility and gives little scope to pass on benefits to future generations. With no chance of growth, an annuity won’t earn you any interest and restricts your ability to invest for the future. In fact, since pension freedom was introduced, sales of annuities have tumbled by 80% according to the ABI[2] (Association of British Insurers).
The easiest way to protect your funds and cut through the confusion is to seek expert financial advice – it’s the best way to understand when you can retire with confidence, while also ensuring your assets are structured suitably and invested in a risk-managed strategy designed to maximise potential returns. An adviser will spend time discussing what is important to you in life, your goals and aspirations for the future, and learn about the important things you want to plan for. Creating a clear vision for your retirement is the most solid route to understanding what is possible with the money you’ve saved.
Seeking expert help both throughout our working lives and as we hit retirement age is a sure way to take the dreaded stress and worry off our shoulders when we hit our 60s.
There is hope when it comes to the increasing retirement age – a financial adviser may be able to plug the gap between when you want to retire and when your state pension kicks in, structuring your assets and income to minimise tax payments and help your money go further. In the best case, retirement may be closer than you imagined!
When planning for our futures, ‘what ifs’ still need to be taken seriously and a rainy-day fund is essential. With the NHS in the UK in turmoil and people living way into their 80s and 90s – the cost of private health care, medication, and elderly long-term care must be accounted for within a financial plan.
In 2017/18, Paying For Care found that the average cost of a residential care home in the UK was £32,344 a year, rising to over £44,512 a year when nursing care was included[3]. Just one hour of daily care can total up to £6,700 per year in some parts of the country. State funding rules are constantly changing – currently, if your assets come to a total of £23,250 or more by the time you or your partner need this type of care, you will be expected to cover all care costs yourself, which could leave you short if the right measures aren’t in place. A financial expert can help with things such as equity release, payment schemes, and insurance policies to guarantee your cash flow and take some of the burden if care was needed.
Although financial planning and retirement planning are essentially two separate entities, they must go hand in hand in order to provide the lifestyle you want. Getting down into the granular detail of your finances as you approach retirement is the best way to assess what actions are needed to maximise your assets to last. Seeking expert help both throughout our working lives and as we hit retirement age is a sure way to take the dreaded stress and worry off our shoulders when we hit our 60s.
As we strive to save, invest and grow our assets over the course of our working lives, the transition to withdrawing and living off those funds may seem a terrifying concept. But through solid advice and good decision making, you can guarantee financial freedom throughout your golden years.
About Cowens Financial Architects
Cowens Financial Architects is a trading name of R A Cowen and Partners Financial Services Ltd, part of Cowens Group. The team delivers a range of financial planning services, focused on helping people to make the right financial decisions, including financial planning, investment advice, retirement planning, and inheritance tax planning.
In addition to the financial planning provided by Cowens Financial Architects, the business also provides corporate financial planning through its brand, Cowens Employee Benefits Ltd.
R A Cowen & Partners Financial Services Ltd. Registered office: Inbro House, Commercial Gate, Mansfield NG18 1EU. Authorised and regulated by the Financial Conduct Authority.
[1] https://www.moneysavingexpert.com/news/2019/01/new-rules-to-make-pensions-clearer/
[2] https://www.iress.com/uk/resources/insight-research/retirement-report-retirement-income-and-annuity-perspectives/
[3] https://www.payingforcare.org/how-much-does-care-cost/
This is the surprising finding of a new global survey carried out by deVere Group.
Those in Generation Y (24-38 years old) who started seeking financial advice from deVere in 2018 on average saved 19 per cent of their income for their retirement.
Those in Generation X (39-53-year olds) put aside 16 per cent on average of their income for retirement; and the Baby Boomers (54-74 years old) 35 per cent.
More than 660 people participated in the survey in the UK, Europe, Africa, Asia and the U.S. amongst new clients taken on by deVere throughout last year.
Of the survey, Nigel Green, founder and CEO of deVere Group, comments: “The results of the saving survey are both encouraging and alarming.
“It is encouraging that millennials – often falsely stereotyped for their sense of entitlement and for being content to pay for overpriced coffees and smashed avocado on toast - seem to be better at saving and more fiscally responsible than many would have thought.
“Despite their reputation for purely living for today, the poll shows that they are saving for their retirement pretty impressively. Putting aside nearly a fifth of their income already is highly commendable, especially when many can be expected not to be yet at the peak of their earning power.”
He continues: “What is alarming, however, is that Gen X, and to an extent Gen Z, workers are not saving nearly enough in order to be able to have a comparable lifestyle in retirement. And by the virtue of being older, they have less time to build wealth before leaving work.
"It’s perhaps particularly concerning because we’re living longer, meaning the money we accumulate has to last longer; in the future, it’s unlikely that governments will be in a position to support older people like they have done for previous generations; there is a looming health and social care crisis; as well growing deficits in company pension schemes.
“In addition, it has to be considered that there might not be the option available to work longer if necessary due to ill health, lack of career opportunities, or because of the need to look after sick or elderly relatives.”
Mr Green goes on to say: “We need to revitalise the savings culture of Gen X especially. Otherwise many of today’s working population are going to reach retirement and find they have to downgrade their lifestyle and/or continue working longer than they had expected and hoped, due to a lack of savings.”
The deVere CEO concludes: “It’s never too late to start saving for your future, but of course the earlier you begin, the easier it will be to reach your long-term objectives. As such, the millennials surveyed deserve huge credit.
“There’s a plethora of financial planning solutions that help you achieve financial freedom in retirement at whatever age you are.”
(Source: deVere Group)
New research from MoneySuperMarket reveals that, amongst younger age groups, saving for a house is a far higher priority than saving for retirement.
Homes are by far the most important savings point for millennials, with 23% of 18 – 34 year olds saying that they are saving for a house above anything else. Those saving for houses are more prevalent among the younger side of the age group – as the figure saving money towards their home rises to 39% among 18-24 year olds.
Only 4%, however, say their primary savings concern is retirement, and 33% of millennials don’t have a pension pot in place. Even those who do aren’t keeping an eye on it, as a further 53% don’t know how much is in their pot.
Many people in the UK haven’t even started thinking about saving for when they stop working. Most have no idea how much they need to save to live a comfortable life in the future, underestimating the cost of retirement by £169,000 on average. However, whilst home ownership can seem like a pipe dream for many young people in the UK, the fact that a house was by far the most prioritised aspect to save for amongst the younger age groups shows that many are still hopeful they can get their foot on the housing ladder.
Using consumer research, MoneySuperMarket has built an interactive tool that people can use to see how prepared they are compared to their peers, with results tailored by the user’s age and gender.
(Source: MoneySuperMarket)
For the past 16 years, Melanie White Terry has been working through her financial advisory firm, Harbor Financial Group. Her clients are primarily busy and highly successful professionals or entrepreneurs that have comfortably broken the six-figure barrier and want to secure their legacy.
Harbor Financial Group helps clients crystalise their objectives and take the time to understand what they want to accomplish from a business and personal perspective; giving them piece of mind.
What are the typical challenges that clients approach you with in relation to the management of their finances?
Most people don’t have the time, knowledge or inclination to implement all of the ideas and opportunities they want to pursue. Many have done some good planning. They have existing relationships with very good advisers. They have spent a lot of time talking about these things but, for some reason, the job never gets done. We will never undo any of the good work that they may already have in place, we tend to focus on their areas of vulnerability. We take responsibility for seeing their plan to fruition.
We typically explore some or all of the following seven areas:
- Family income and security
- Asset Shifting
- Asset Distribution
- Estate Equalisation
- Business Succession
- Asset Protection and Estate Depletion
- Charitable opportunities
What are the most important aspects that need to be ironed out in order to achieve satisfactory result and a well-organised retirement plan for your clients?
Understanding my clients’ objectives is paramount. I want to know how they feel about the areas they would like for us to consider: security for themselves and their spouse, estate distribution, general terms of their will or plan, succession plan, key employees, and tax issues.
It is also important to gather information about their family, business, real estate, liquid assets, qualified plans, life, disability and long-term care insurance, liabilities, charitable giving, and advisers.
Identifying issues and gaps in their planning and how they feel about them is critical.
Lastly, our clients should have enough discretionary income and/or sufficient assets to be able to either execute or at least begin the plan and the willingness to learn about what might be non-traditional planning opportunities.
How do you assist clients with finding out if they are compliant with federal requirements applicable to retirement? What are the key issues that they face in relation to compliance?
We collect statements to support all of the information that we gather and keep up with the changing laws and regulations by taking applicable continuing education courses and leaning on the consultants on our team that have a wealth of expertise in tax law as attorneys and CPAs.
Additionally, we do a proper fact-finding analysis to determine their time horizon, investment risk tolerance and ensure that they are in plans for which they qualify, based upon their income, employer plan offerings, business structure, employee information etc.
How can your clients ensure that as much of their estate goes to their family on their death?
Insurance is one of the foundations in a comprehensive planning strategy. We assess the amount and type of coverage they have already relative to their objectives and determine if there is a gap to fill.
We tend to recommend that our clients have enough life insurance to replace their income and pay off liabilities to creditors and Uncle Sam. When appropriate, we may recommend establishing appropriate trust documents.
Disability income insurance is recommended to protect what could be their greatest asset; their ability to earn an income.
Long-term care planning is recommended to protect assets because most of our clients did not budget for an additional $7,000-10,000 per month of expenses to self -insure above their retirement expenses.
Does Harbor Financial Group offer any solutions in respect of maintaining and growing wealth for future generations of the same family?
We make it a common practice to reach out to beneficiaries and other family members of our clients to address their planning needs as well.
Contact details:
9861 Broken Land Parkway, #150
Columbia, MD 21046
Telephone: 410-740-4719
Website: harborfinancialgrp.com
Email: mwhite@ft.newyorklife.com
Nine out of ten workers are ‘financially sleepwalking’ into retirement, reveals new research.
Carried out by deVere Group, the research finds that 89% of all new, working age clients did not realise how much money they would need in order to fulfil their own retirement ambitions before they began working with an independent financial adviser.
More than 750 new and potential clients in the UK, the US, Australia, South Africa, Hong Kong, Spain, Qatar, France, Germany, and the United Arab Emirates participated.
Of the findings, Nigel Green, founder and CEO of deVere Group comments: “It is very alarming indeed that nine out of ten workers are financially sleepwalking into their retirement.
“The poll concludes that the overwhelming majority simply do not know just how much they will need to save during their working lives to fund the retirement they desire. Not knowing how much they will need for something as important as funding their retirement is worrying.”
He continues: “It’s particularly concerning in this day and age because we’re all living longer meaning the money we save has to last longer. Also, because governments are unlikely to offer the same level of support as they have done for generations before due to an ageing population and shrinking workforces; because living, health and care costs will increase significantly; and because company pensions are less generous, if they exist at all.”
How much people need to be putting aside now, and in the years to come, in order to be able to enjoy the retirement they want for themselves and their families does vary from person to person, of course.
However, as Nigel Green observes, there is a consistent theme: “Before they have an initial meeting with an adviser, the vast majority of people underestimate how much they need to be putting aside for their retirement. This is the case across all incomes, working age brackets and nationalities.”
He adds: “People are typically shocked when it is revealed how much they should be saving now to realise their own retirement ambitions later on. They have usually considerably underestimated the money they will need.”
The deVere CEO concludes: “Despite the shocking poll, there are always methods to plan and maximise retirement savings at every stage of your working life.
“But it cannot be stressed enough that the earlier you start your retirement planning strategy, the easier the journey to hitting your goals will typically be. I would urge people to take their heads out of the sand and get informed.
“By putting in place a clear, workable plan, you’re laying the foundations to have a comfortable and financially secure retirement.”
(Source: deVere Group)
Jayne Gibson is a professional financial planner, a pension transfer specialist and the Managing Director of Insight.Out Financial. Below, Jayne speaks to Finance Monthly about defined benefit schemes and the challenges they can come with them, as well as the one thing she would change about them if she could.
Tell us about Insight.Out Financial and your professional career?
We are a friendly and approachable company with a wealth of expertise in pension transfers, personal & corporate financial consultancy. We make our experience and knowledge very accessible to our clients with our empathetic approach, but most importantly - our charges are transparent, fair and reasonable.
I started the company in August 2015 with the aim of building a business that is customer-focused and provides exception standards of service and advice, with professional ethics at the core of our proposition. We are based in Belfast, Northern Ireland, however we have a UK-wide clientele, and regularly visit all regions in Britain.
I have been a Pension Transfer Specialist since 1998, and have extensive experience in advising on occupational pension schemes, including Defined Benefit, Defined Contribution, as well as more specialist pensions for small business owners.
I am one of the first Chartered Financial Planners in the UK and am also a Fellow of the Personal Finance Society since January 2006, as well as a Chartered Fellow of Chartered Institute of Securities and Investments since 2012. I have continued with my studies, being awarded a Masters in Financial Planning & Business Management in 2012. I am currently working towards a PhD, with a focus on building consumer confidence in the financial planning profession.
What attracted you to the defined benefit pension schemes field?
I have been advising on Pension Transfers for more than 20 years. When I first started, there were very few advisers qualified to advise on pension transfers and a lack of knowledge and understanding of the value of the benefits offered and the impact for members of occupational schemes. The main reason for this was the highly complex legislation in place at the time, which was different depending on when a member joined and left a scheme. Pension simplification in 2006 did bring the personal pension and occupational pension regimes in closer alignment, and over the next 10 years, successive legislative changes, culminating in the pension freedoms legislation in 2016 have meant that more and more people need advice.
The advice for many of my clients with defined benefit schemes is life-changing. It is the biggest financial decision they will ever have to make, and will have the biggest impact on their, and their family’s future lifestyle. Changing demographics mean that the traditional “one size fits all” approach for most defined benefit schemes is less and less relevant. More and more people are looking for a different solution and wanting to shape their own personal retirement.
How do defined benefit pension schemes work?
Defined benefit schemes, often referred to as ‘Gold Plated Pensions’ are offered by companies for the benefit of their employees. Traditional style schemes provide a fraction of a member’s salary at retirement for each year they have been in service. For example a 60th scheme would provide 1/60th of a member’s final salary, multiplied by the number of years they had worked for the business:
For example:
John has worked for his employer for 27 years and is due to retire at the age of 65 with a final salary of £26,000. His pension income is calculated as 27/60ths x £26,000 = £11,700. The pension of £11,700 is payable from John’s 65th birthday and will increase in payment in line with inflation. It is guaranteed to be paid for the rest of John’s lifetime.
At retirement, most schemes will offer an option to take a cash free lump sum. This can be paid as a lump sum in addition to the pension, or by commutation where part of the income is given up in return for a lump sum. The maximum lump sum available is calculated using HRMC formula of (20 x pension) @ 25%, or another method set down in the scheme rules. If an alternative method is used it cannot exceed the HMRC maximum amount. A commutation rate is then applied to the lump sum to calculate the amount of pension that is given up in exchange for the lump sum required. The scheme actuary will set the commutation rate and this can vary greatly from scheme to scheme. Most public sector schemes use a standard 12:1 rate, however private sector schemes have more flexibility and may choose a rate which more closely reflects the cost of the pension given up.
For example:
John has an option to take a cash lump sum by giving up some of his pension. The maximum lump sum he can take is calculated at (£11,700 x 20) @ 25% = £58,500. If he wishes to take the full lump sum, he will have to give up a proportion of his pension. This is calculated using a commutation rate of 12:1. His reduced pension is calculated as follows, £58,500/12 = £4875, £11,700 - £4875 = £6,825 pa.
Many schemes will also provide death benefits for a surviving spouse or in some cases, other financial dependent. This will generally be in the form of a spouse or dependent’s pension, calculated as a percentage of the member’s pension. There are many variations to the formulas used by schemes to calculate these benefits and the eligibility criteria applied by each scheme when assessing a survivor’s entitlement to benefits, it is essential for members to fully understand these, especially where their circumstances are not straight forward. Some schemes will only pay death benefits to a legal spouse, where others have a more generous approach and will consider a life partner, where financial interdependency can be established. It is also important to understand that spouse benefits are not a contractual entitlement and are paid at the discretion of the trustees. Spouse benefits can be reduced and even stopped in some circumstances, e.g. where the spouse remarries or is even co-habiting.
For those in same sex marriages, and civil partnerships, it is especially important to understand the scheme’s eligibility criteria. Under current legislation, there is no compulsion on schemes to change their scheme rules to accommodate changes in legislation. Where rules have been amended, in some cases this will only date back to the date the relevant legislation came into force.
Most schemes will also guarantee to pay the member’s pension for a minimum period of time, generally 5 years but could be as much as 10 years. This in effect means that the member’s full pension will be payable for at least the period of the guarantee period. Any outstanding payments are paid as a lump sum and any spouse pension will commence in payment.
For example:
John retired at the age of 65 and unfortunately passed away after two years. His nominated beneficiaries will receive a lump sum of 3 x £6,825 = £20,475, plus John’s wife will start to receive a pension of £5,850 pa (50% of the unreduced pension), which is payable for her lifetime.
Most public sector schemes such as NHS, Teachers Pensions and many local government pension schemes, conform closely to this format, however since 2014, many have changed to a career average basis (CARE) to calculate benefits. Members earn a fraction of their earnings for each year which is increased in line with government published rate of inflation. These are accumulated each year to arrive at final pension entitlement. One of the biggest differences is that transfers are not available from unfunded schemes (e.g. NHS, Teachers schemes) unless going to another defined benefit scheme. Generally local government schemes do still allow transfers to a flexible pension plan.
Private sector schemes are much more varied and it is much more important to fully understand the benefits a member is entitled to. Each scheme will have their own individual combination of benefits covering the whole spectrum of how benefits are accumulated, how they increase in deferment for leavers and in payment from retirement, death benefits available, and entitlement to early or late retirement. Private sector schemes are also more susceptible to financial insecurity of the sponsoring employer.
What are the typical challenges that clients approach you with in relation to transferring their defined benefit pension?
Many clients are now much more aware of the options that are available from personal pensions with the introduction of pension freedom legislation. There is now much more coverage in the media, and availability of information via internet, informing consumers of the benefits of flexible benefits in retirement, and current high transfer values has prompted a huge increase in enquiries for advice.
The main areas of concern are:
- Flexibility & control – Many more people have a different outlook on retirement rather than working to 65 and then stopping there. People would like to consider winding down or even the possibility of a career change from a stressful job to something more enjoyable. Pension freedoms offers many more options that may be more suitable, however these are not available through a defined benefit regime.
- Availability and value of death benefits - Demographics have changed significantly in recent years and the traditional model, based on nucleus family, no longer works for many people. Families often have complex relationships where it may not be easy to identify financial dependency for one individual. Scheme rules vary significantly and the availability of spouse pension, or dependent’s pension is generally at the trustee’s discretion rather than an automatic right. This is specifically relevant for anyone in same-sex marriage or civil partnership as schemes do not have an obligation to change the rules to accommodate these arrangements, and even where they do on some occasions this will only be backdated to when the law was changed therefore people who believe they are entitled to benefits may not actually receive what they expect.
- Pension taxation considerations - pension taxation has changed considerably over the last 10 years, most significantly with the introduction of the lifetime allowance and annual allowance regime. Individuals, even with relatively modest earnings but a long career or people who have large increases in salary in a particular tax year could see themselves faced with a tax bill because their annual allowance has been calculated in excess of the £40,000 limit. Anybody with a pension benefit in excess of £50,000 per annum in a final salary scheme will face an income tax charge when they take their benefits. While it’s important to understand and quantify the implications of taxation, this does not always lead to a need to transfer benefits from a defined benefit scheme, and is only one of the factors taken into account.
- Financial security of the scheme - financial security is probably one of the most topical issues in relation to defined benefit pension schemes. With recent highly publicized failures such as BHS, Carillion and most recently - British Steel, this has become a matter of great concern for many people in final salary schemes. It is important to understand that where the scheme may have a deficit, the long-term financial standing of the scheme is based on the sponsoring employer’s ability to continue funding the scheme. The employer also has a legal requirement to make provision in their accounts for any shortfall in the scheme and agree a funding schedule with The Pensions Regulator which has to be approved and details published to members.
What can happen to scheme members’ defined benefit pensions if their employers become insolvent and the scheme doesn’t have enough funds to pay their benefits?
As mentioned above all schemes are backed by an employer’s covenant, and there is a charge over the employer’s assets effectively, which can be called on to meet scheme deficits. Where the employer fails and there are insufficient assets available, then there is the option of going into the Pension Protection Fund (PPF). This is a government-backed scheme funded by other occupational pension schemes and provides a level of protection for members where the sponsoring employer has gone into liquidation or otherwise failed. There are some limitations on the benefits that will be provided, in that only 90% of the benefit is guaranteed, and there is a cap on benefits which is, £39,006.18 (equating to £35,105.56 when the 90% level is applied) per year, from 1 April 2018. This is set by DWP. It is important to note that the government does not underwrite any guarantee provided by the scheme, on the compensation paid by the PPF is limited by the funds available.
What would you say are the specific challenges of assisting clients with defined benefit schemes?
One of the main challenges is helping members to properly understand the benefits they have accrued in the scheme and their value, and to dispel some of the myths and misconceptions that are prevalent at this time. It is essential to show the benefits in a proper context, and how these compare with the alternatives available. One of the ways we do this is by using cash-flow planning to project future inflows and outflows and compare this with the financial impact the members’ financial resources. This helps to show how achievable or not the retirement plans are, and to look at all the potential ‘what if’ scenarios, especially early mortality, poor investment performance and potentially running out of money if they were to transfer the benefits.
Another challenge is to explain the loss of guarantees, on the impact of charges and investment risk. It can be difficult to see past a large lump sum and consider the actual income benefits that the plan provides. When dealing with individuals who have little or no investment experience, and possibly, this will be the first time they have dealt with financial adviser sought advice of any kind, it is important to ensure that explanations are provided in a manner that the individual can understand and that the gravity of the loss of guarantees is properly explained and demonstrated.
In the progression of your career, how are you developing new strategies and ways to help your clients?
Our approach for dealing with all our financial planning clients is the same regardless of whether or not they have a defined benefit scheme. We take a holistic approach which takes into account the stated objectives and all the financial resources. We then complete our financial analysis which establishes their needs. In this way, we not only consider what the client wants, but what they actually need in order to achieve their goals in the future.
We have developed a very detailed, client-centric process, which focuses on communication and providing high levels of professional service to our clients to achieve their ultimate goals. We continually review and amend processes to ensure continued delivery of the promised services and to improve these where we can, and we are always investigating new and better ways to improve communication with our clients.
We are also embarking on a research programme to develop a specific investment strategy to match the flexibility and challenges provided by pension freedoms and flexible drawdown.
If you could, what would be the one thing you’d change about defined pension schemes?
It would be a great improvement for members of defined benefit schemes if there was more clarity in relation to what they should expect from financial advisers in the provision of advice. Also, clarification the obligations of trustees to provide the information required to enable financial advisers to properly assess the members’ benefits as part of this process. Currently, the Financial Conduct Authority regulate financial advisers as set out the standards for the provision of advice, and The Pensions Regulator sets out the obligations for trustees in terms of the provision of a statutory cash equivalent transfer value and the information it needs to be provided with that. There are no specific rules or guidelines laid down for trustees in relation to the information that they should provide to financial advisers, and on occasions this can cause problems and delays in obtaining the information in a timely manner.
Also, from a members’ point of view, more availability of partial transfers from defined benefit schemes will be greatly advantageous. Currently, while the legislation allows this, there is no obligation on a scheme to offer this to members.
What is your overall piece of advice for Finance Monthly’s readers in regards to defined benefit schemes?
Take time to understand the value of the benefits you have, in the context of your own personal circumstances. It’s important that individuals fully appreciate the exact benefits that they, or their family will be entitled to during their lifetime and in the event of death. Being offered a large lump sum of money can seem very attractive, however that money could run out at some point is important to ensure that they have a plan B that is realistic and feasible if this happens.
Do you have a mantra or motto you live by when it comes to helping your clients with defined benefit schemes?
This is the biggest financial decision they will ever have to make and it will have an impact on the rest of their and their partner/spouse lifetime. It is a huge responsibility on the shoulders of the adviser to provide proper and accurate advice, as there is no going back once this decision has been made.
Financial professional and Founder of Texas-based Hybrid Financial Rocky Campbell established his company to offer premier retirement services and believes in doing business with integrity. Below, he discusses the financial services that his company offers, as well as his tips for a well-organized retirement plan.
Please tell us a little about the financial services that you help clients with.
While Americans are presented with an ever-changing financial marketplace, making the right financial decisions at the right time can be critical to achieving their financial security and accomplishing financial objectives. Hybrid Financial will guide the process of identifying financial goals, account organization, risk analysis, and problem solving to help their clients accomplish their financial goals safely and simply.
What would you say are the specific challenges of assisting clients with financial solutions?
Not every client is a right fit us and realising that from the start will save both of us time. I’m not the jack of all trades I’m a specialist. Specifically, a specialist in safe money solutions and income producing retirement strategies. I’m real - I don’t tell people what they want to hear. I stick to a single message - safety of principal. I’m a hardworking and straightforward person I believe that if you do the right thing for people, things will work out for you.
What are the most important aspects that need to be ironed out in order to achieve satisfactory result and a well-organized retirement plan for your clients?
We form a strategy that will best fit the client’s needs and will help them feel confident about their financial future.
How do you assist clients with finding out if they are compliant with federal requirements applicable to retirement?
Compliance is important. Our compliance officer will ensure that as the world changes around us, we change with it and notify our clients of any regulations that need to be adhered to.
How can your clients ensure that as much of their estate goes to their family on their death?
We use beneficiary driven products that bypass probate and go directly to the named beneficiary. We believe that all money should go to the family. A living will, or trust can also assist in providing clarity during time of death.
What’s Hybrid Financial’s philosophy?
I don’t do things that I don’t really, really believe in. And something I believe in is the message of the tortes and the hare. Now the hare was fast, but the tortes won the race. Slow and steady wins the race. If we can prevent our clients from going backwards and losing any of their assets to fees and stock market declines, they have more power to win the money game. That’s what I do - I help people slowly and steadily win their financial race, one person at a time.
Gary Scheer is the Founder and Managing Member of New Jersey-based Gary Scheer LLC, Complete Financial and Retirement Planning. His company’s unique process enables their clients to enjoy a bigger future through a comprehensive, holistic approach. By implementing creative financial and legal strategies, Gary and his team help them protect, preserve and pass on their wealth to have a big impact on their family, friends, and the causes they care most about. This month, Finance Monthy had the opportunity to speak to Gary and learn more about the retirement solutions that his company provides.
How should individuals in the US plan for early retirement? What options are available above and beyond a pension?
Retirement planning in the US is like having a three-legged stool. The first leg is a pension, the second leg is Social Security, and the third leg is one’s personal savings. Unlike during our parents’ working years, today most Americans do not have a pension plan. They may have employer-based programmes, such as 401(k) and 403(b) plans and brokerage accounts that they have used to accumulate money. However, these accounts may be very volatile and offer few, if any options to provide a guaranteed income for life. One of our tasks is to help people create predictable, guaranteed streams of income to supplement their social security and pension pay-outs. We utilise various financial and legal tools to make this happen. In addition, we’ll employ certain creative financial strategies to optimise the non-guaranteed portion of our clients’ portfolios to keep up with inflation and protect them from the potentially devastating costs of unreimbursed medical and long-term care expenses.
What would you say are the most common retirement plans that clients in New York and New Jersey look for?
New York and New Jersey are two of the most expensive states in the US in which to retire.This may become more apparent over time, due to the recent passage of the Tax Cuts and Jobs Act. This will limit the tax deductibility of state and local taxes, commencing 1 January 2018. Most Americans were taught that they should put as much money as they could into Tax Deferred accounts such as IRAs, 401(k) and 403(b) plans. Doing so enabled those to take a tax deduction in the year the investments were made. The money in the accounts was not taxed during the growth years and would only be taxable when the account holder retired and presumably dropped into a lower tax bracket. Many of our clients are shocked to learn that they are in the same or higher tax bracket in retirement than they were during their working years. Between having no more dependent children, little if any tax deductible mortgage interest, and no more tax deductible retirement plan contributions, nearly all of an average retirees’ income is taxable. In addition, investors who contributed to IRAs and employer-based retirement plans during their working years are forced to begin withdrawing from these accounts after turning 70½ through government mandated Required Minimum Distributions (RMDs) whether they need the income or not. Another surprise for many retirees is that their social security income may be taxed. Individuals earning $25,000-$34,000 per year in retirement may be taxed on up to 50% of their social security income. Those with incomes in excess of $34,000 may be taxed on up to 85% of their social security income. For married couples filing joint tax returns, the figures are $32,000-$44,000 and above $44,000 respectively.
What are the most common challenges that people in America face in regards to preparing for a retirement?
There are many risks and challenges that Americans face as they to people living much longer than company actuaries projected. As a result, due to longer life expectancies, those fortunate enough to have a pension are at risk that their former employer, whether a private company or government agency, may not be financially solvent to continue making their promised payments in the future. This may put extra stress on one’s personal savings in order to protect them in the event of potential pension fallout. In addition, since people are living so long, they run the risk of having many years of unreimbursed health to prepare to pay for retirement. One of the biggest and long term care expenses in retirement. This is known as the 'Longevity Risk'. By helping our clients take Longevity Risk ‘off the table’, all of the other risks that retirees must deal with such as stock market risk, interest rate risk, sequence of return risk, liquidity risk and legislative risk will rarely become an issue as people age.
What attracted you to this field? How challenging is it to work in an ever-changing regulatory environment?
In the early stages of my career, I worked primarily with middle management executives and small business owners in connection with their employee benefits, risk management and retirement planning. Then in 2000, a tragic event in my wife’s family changed the focus of my practice to retirement and estate planning. My wife’s grandmother was a frugal but loving woman who worked hard to provide for her three daughters. She owned a knitting store for over 50 years and had built an estate worth nearly half a million dollars. After her death in 2000, the family learned that the estate was nearly bankrupt and all that remained were several small pieces of jewelry which were fought over by the sisters. “How could this happen”, I said to myself; “Where did all the money go?” The answer - in 1994 my wife’s grandmother broke her hip and after a successful hip replacement surgery, went into a rehab/nursing home for 45 days of post operative care. She had one daughter living with her at the time who decided to keep her mother in the nursing home for 6 years at a cost of nearly $400,000! I was shocked and saddened no one had consulted a financial planner to look at alternatives to nursing homes and implement strategies to protect the estate of a woman who worked so hard to build her legacy. This stirred a passion in me to help other families and people near retirement age to protect the wealth they have worked so hard to accumulate. Since then, the financial services profession has become one of the most highly regulated fields in our country. In 2016, the Obama Administration issued new Department of Labor (DOL) Rules mandating that financial professionals offering financial advice involving retirement assets operate as Fiduciaries and "act in their client’s best interests". While one would hope their adviser will recommend products and services that are in a client’s best interests and not merely what is suitable’, when the government gets involved and mandates what private companies should and shouldn’t do, compliance expenses commonly rise dramatically and cause advisers to stop working for smaller clients, the ones who were supposed to benefit from such legislation. Currently, the Trump Administration has put some of the more onerous requirements of the DOL Ruling on hold for further investigation.
How has retirement planning in the US changed in the past 35 years?
In the early 80s, IRAs and 401(k) plans were relatively new. People typically worked for one company for their entire careers, retired with a pension; and along with Social Security, had enough money to enjoy a retirement with few, if any, financial worries. Since then, most private US employers have disbanded their pension plans and offer Defined Contribution Plans such as 401(k)s that require employees to fund a large percentage of their retirement nest eggs. These plan participants have been forced to become their own pension and retirement plan managers with minimal education, training and experience and a limited selection of funding options for what for many is their greatest single financial asset. According to the Society of Actuaries, if a couple is married, there's a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. As a result, having a plan to cover health-related expenses and not run out of money is more critical than ever before.
What is the single most important piece of advice in regards to retirement you would offer to American people?
It is a lot more challenging to plan and implement how to manage one’s assets in the distribution phase of their investment life than during the accumulation stage. This is not a do-it-yourself proposition. Hire a Fiduciary Financial Adviser who specializes in retirement distribution planning to put the odds of success in your favour.
Website: http://garyscheer.com
