When I first started as an IFA in 1973 the Government of the day were allegedly close to mandatory pensions. Their big plan was to make sure all employees, even in small businesses, could look forward to a second pension on top of State Pensions.
Cynics at the time told me they’d believe it when they saw it. Their view was Pensions was a political football and the new Government would kill off the plans. And that’s what happened.
And now it’s almost 2011. We still don’t have mandatory private pensions thanks to 37 years of political bickering. But look – it’s about to happen!
Our Government is pushing ahead with plans to force employers, regardless of size, to contribute to staff pensions. But it seems smaller businesses are fretting over the financial impact on bottom line.
The intention is by October 2012 every employer will be required to make contributions towards staff pensions through an eligible scheme, either already in place, or via the newly created National Employment Savings Trust – Nest eggs for employees – you could say.
Now before employers get too upset about this, legislation has already changed 55 times, and today’s cynics tell me further changes are likely before this becomes law, if it ever does. In this case, past performance is probably a good guide to the future!
But let’s assume it goes ahead. Some business owners think it’s an unpalatable financial burden, and are already in a beleaguered economy, but are things really that bad?
Let’s take the business owners first. In the 37 years I’ve been giving advice to business owners far too few think about pensions early enough. Or they believe their best pension is their business – both misconceptions have disastrous consequences.
In the first instance they’ve obviously never heard of the value of compound interest. If you can get a 9% annual return within your pension fund then you’ll double your wealth every 8 years. If you sit down with a pencil and a piece of paper, pick any amount of money going in and double it every 8 years, you’ll be amazed how much money you can build, in a fund free of CGT.
In the second case the truth of the matter is that if you take money out of your business to invest in pension plans and you sell your business, at some point in the future the fact is you’ll receive the same amount of money for the business whether or not you made the contributions to pension. In this instance a pensions fund sitting outside a business is therefore money for nothing!
But when it comes to employees all research shows the better you look after them, in a world of skill shortages, the better quality people you will attract. And as a consequence your business will perform better, financially too.
And is it that much of a contribution? Apparently, the total contribution to NEST or equivalent is in the order of 8% of which the employer will contribute about half. And shouldn’t your employees consider that it’s not a bad idea to contribute to their retirement another 4% which would avoid NIC and tax. Also, giving them hope of a better retirement.
Finally, a couple of other points. Charges applying to these new plans need not be at levels we’ve seen previously. There are inexpensive pension arrangements around these days so do shop around. Secondly, the real key to creating decent sized funds is investment performance.
When it comes down to it investment performance is crucial. 25 years ago the Institute of Actuaries came to the conclusion that performance is 10 times more important than charges. I couldn’t agree more.
Alan Steel, Chairman , Alan Steel Asset management Ltd
