Isas and share schemes are tax-efficient alternatives to pensions as savings vehicles.
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- Corporate Isas are a more attractive savings option than pensions for younger employees.
- Sharesave schemes offer a ‘no-lose’ option for employees to make sure of a savings windfall in a few years’ time.
- Alternative savings schemes can be co-ordinated by placing them on a corporate platform.
Ask the average person to name their favourite types of investment, and they are unlikely to pick pensions. It is far more likely that Isas (individual savings accounts) or share schemes will come to mind first. And they are putting their money where their mouth is. In the last tax year, Britons saved more into stocks-and-shares Isas than they did into personal pensions.
The appeal of Isas is clear. Staff understand exactly what they are investing in, they can put their money where they want, and can take their money out whenever they need to and spend it on whatever they like. Mark Taylor, director of investment services at Equiniti, says: “Many people struggle with tying their money up for a long period of time. The immediacy of Isas is a major attraction.”
Laith Khalaf, pension investment manager at Hargreaves Lansdown, says Isas strike a particular chord with younger employees. “For young people, a pension is so far away that they don’t find it engaging,” he says. “They may be saddled with student debt, or trying to save for their first property, so pensions are a low priority. These people are far more likely to engage with a savings product that meets their medium-term needs.”
Attractions of Isas
The flexibility of Isas is also a boon for this group. Jamie Jenkins, head of workplace strategy at Standard Life, says: “If you save into an Isa and your position changes and you don’t need the money to, for example, buy a property, then you can transfer it into a pension. In fact, if you were a basic-rate taxpayer when you started saving and a higher-rate taxpayer when you put the money into a pension, you will benefit from a higher rate of tax relief. But, of course, the tax position can change.”
For higher earners, Isas provide an alternative when they are approaching the annual £50,000 cap on pension contributions. Khalaf says: “It is only really senior management who are likely to run into this cap at the moment, but a corporate Isa provides an alternative way for their employer to channel reward. Also, there is a chance that the annual cap could come down, or that tax relief could be restricted. Employers with a corporate Isa in place have a solution.
The Mercer Defined contribution and workplace savings survey, published in December 2011, highlighted the attractions of Isas, says Emma Douglas, head of workplace savings at Mercer. “We saw a groundswell of interest from staff in something other than a pension,” she says. “At the same time, a number of platforms have gone live, so we have employee demand and we have supply. Where the interest remains to be seen is from employers. We are still waiting for them to buy into the idea.”
At the moment, workplace savings beyond pensions are more likely to be in the form of share schemes, particularly sharesave, which offers a ‘no-lose’ option. Employees are given the choice to purchase shares at a point three or five years in the future at a price that is fixed today. While the scheme is running, they put money into a savings plan every month, and at the end receive a tax-free bonus.
If the share price rises during that time, staff can use their savings to buy shares at a much lower price, sell them and make a profit. If the share price falls, they can keep the cash they have accumulated. So, in three or five years’ time, they can be sure of a windfall.
Most employers run sharesave as a stand-alone benefit, but more and more are using a corporate Isa or pension to make share schemes even more attractive. After a scheme matures and employees buy shares, if they make more than £10,600 profit (in the 2011/2012 tax year), they will be liable to capital gains tax on any amount over this. But if they roll it into an Isa or pension, there is no tax to pay. Equiniti’s Taylor says: “If someone has been with the company for a long time and has a number of schemes, they could be liable to capital gains tax, so the Isa offers a solution.”
Moving into an Isa allows employees to invest more broadly and overcomes one of the key problems with sharesave. Standard Life’s Jenkins points out: “A share scheme means you are effectively investing in a single share, and your risk is very dependent upon the performance of that company.”
These savings schemes can feed off each other. Sharesave may draw staff into a corporate Isa, and a full and flourishing Isa could tempt them into a workplace pension. This interaction can be made even more direct by placing them all on a single platform. Khalaf says: “It offers employees long-term, medium term and short-term savings all in one place, so it caters for all of their needs. It also benefits the employer by simplifying administration.”
Although the benefits of workplace savings are clear, Isa take-up is largely in single digits, partly because it is a relatively new benefit. But there are two factors that are likely to change the market dramatically, and the first is employer contributions. Mercer’s Douglas says: “Take-up is far better where employers offer a core contribution to the pension and a top-up which can go either into the pension or an Isa”.
Jenkins adds: “The big turning point has not happened yet. Generally, employers do not contribute. Until we see that, I don’t think we will see a surge in the use of workplace Isas.”
The second factor is auto-enrolment, which will undoubtedly affect the market – but how? Jonathan Wood, pensions consultant with Jelf Employee Benefits, says: “I came across an employer that used to let younger staff save into an Isa and join the pension scheme later. That has been pulled for auto-enrolment.”
On the other hand, Jenkins says some employers are looking to corporate platforms to help them handle auto-enrolment. And Taylor says the fact that employees will be joining a pension could boost workplace savings more widely. “Over the coming year, auto-enrolment will encourage people to take more financial responsibility for their future, and on the back of that, we will see take-up of other workplace savings increase,” he says. Jon Dixon, corporate advice manager at AWD Chase De Vere, adds: “We need workplace savings that are simple, attractive and understood by the consumer.”
THE ASHMORE GROUP
Employees rush onto platform The Ashmore Group, an investment management company specialising in emerging markets, has more than 130 employees, based in London.
It launched a corporate Isa in March, as part of a corporate platform, to replace the company’s self-invested personal pension (Sipp). The platform itself had a 100% take-up, because it included the company pension, which is non-contributory and entirely funded by the employer.
However, 16% of staff also took up the option of a corporate Isa, which is a relatively high take-up for a new benefit of this type.
Stuart McIntosh, head of employee communications at Hargreaves Lansdown, which runs the platform, says the high take-up was partly due to a communications drive that saw 75 staff have one-toone sessions. As a result of those meetings, 43% of employees started contributing to workplace savings, and there was a 20% uplift in the value of contributions.
McIntosh adds: “The nature of the company also means there is an interest in investment, and staff liked the range of choice of investments. They can choose from 2,600 funds, including their own, and any shares, including their own.”
Rob Edwards, head of human resources at Ashmore, says: “The corporate platform has proved a convenient, flexible solution for our employees. Any employer that wants to give their staff more options for savings should consider this type of scheme.”
HOW THE TAX BENEFITS STACK UP
TAX ON PENSIONS
Money saved in a pension receives tax relief at the taxpayer’s marginal rate, so very high earners could get 50% tax relief. The fund grows tax-free, but after it has been used to buy an annuity, there is tax on the income.
TAX ON SHARESAVE
Sharesave investments are made from taxed income. At the end of the savings period, they receive a tax-free bonus. However, if a profit is made on the sale of shares, capital gains tax may be payable.
TAX ON ISAS
Money goes into Isas out of taxed income. It grows free of tax in a cash Isa, but dividends in a shares Isa are subject to 10% tax. When the shares are sold, they are free of capital gains tax.