Corporate ISAs and the Road to Pensions (Oct 2010)

Will employees settle for less in retirement?

Based on recent surveys by YouGov employees may have no choice! Data collected in a survey of 2000 people over the age of 18 has highlighted a very worrying and widening gap between individual�s expectations and the reality of their prospective retirement income.

�Crunching� the numbers illustrates the stark reality that for an average individual the current �reality gap� equates to a capital sum of £50,000 per person of working age � the equivalent of two years of average gross pay. Indeed all reasonable assumptions indicate a poor scenario which is worsening, and has gathered momentum over the last 6 years*. (*Based on the 2004 Independent Pension Commission report).

Saving for retirement is a major issue and one of the largest socio-economic problems confronting the new coalition government in the UK. It is however something which we can all participate in trying to address.

Post �credit crunch�, consumer expectations have become tarnished and as a consequence people are far more receptive to the idea of saving, something which was until very recently not the case. For many, especially the under 30�s, the economic cycle has created an opportunity to promote awareness of the necessity of saving for the future, in order to provide a good level of economic comfort in retirement.

It is against this background that many employers have been considering a Corporate ISA as a savings alternative. Whilst some Corporate ISA schemes are seen as a savings solution for higher earners affected by the restrictions on personal tax relief, there is also a compelling argument for employees in general to make use of their ISA allowance. By linking the process to payroll, employees can easily ensure that the savings are made and not diverted to other uses! Employees may contribute up to £850 per month from their net pay, or make one off contributions (e.g. from bonus awards).

A Corporate ISA solution should not be seen as a replacement for a pension, for one thing the tax benefits are not as attractive for the vast majority. However, for younger members of an organisation, typically the 20 to 34 age bracket, there may be more immediate priorities ahead of saving for retirement (student debt, buying a flat,) which could be dealt with via the savings made in an ISA.

Creating a �savings habit� early on in an individual�s career, should result in employees who are used to saving and who are therefore much more likely to continue the habit, diverting money into a pension when it is appropriate.. Although working to age 70 is likely to become much more commonplace, if not the norm, switching the focus from ISA savings to a pension saving for an individual in their early 30�s should still provide sufficient time for savings to meet income objectives later in life.

Benefits of a Corporate ISA

A corporate ISA can:

Provide economies of scale due to competitive charges on group schemes
Provide access to tax free lump sums at important life stages
Promote the savings habit
Promote awareness of investments
Provide an opportunity for financial education and personal application of knowledge
Provide for savings objectives over a 3 � 10 year event horizon
Lead to greater financial awareness of retirement and pension matters
Provide for better financial health and wellbeing

Those who save in ISA schemes can use the money for many purposes besides paying off a debt or saving for a pension. The ISA could be used to fund a special holiday, a one-off purchase, getting married, buying a car or a deposit for property. These are all things which can improve your employees well being.

For more information on how a Corporate ISA could benefit your organisation, and help meet the savings needs of your employees, call Cartlidge Morland�s Employee Benefits team for a free initial consultation.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

Phone us on 020 7709 5560 or complete the online contact form