By John Joe McGinley, Product Marketing Manager Individual Pensions, Scottish Life. Millions ...
By John Joe McGinley, Product Marketing Manager Individual Pensions, Scottish Life.
Millions of workers in company pension schemes face an impoverished old age unless they increase their contributions according to a recent report from WM Mercer consultants. Money purchase schemes are particularly vulnerable, as the report outlines that many members may have to double their contributions to get the pension they expect.
The report blames longer life expectancy, falling stock market returns, extra taxes on pension funds and low annuity rates for the shortfall.
Prior to 6 April 2001, the traditional method was to top up the company scheme pension through an AVC or FSAVC. However, the Concurrency rules now allow members of an Occupational Pension Scheme - Final Salary or Money Purchase - who are not a Controlling Director and whose annual earnings are £30,000 or less, to make contributions of up to £3,600 per annum or £300 per month to a Personal Pension Plan, in addition to any contributions being paid to the OPS.
An important point to remember is that the concurrency earnings are P60 i.e. gross taxable income (excluding P11D) after pension contributions.
Experts believe that 89% of the UK working population, around 24 million people, earn £30,000 or less, highlighting the potential size of the market for IFAs, a market that seems to have been largely overlooked until now.
Inland Revenue estimates are that 8 million members of occupational schemes will be eligible to take advantage of these new rules, and IFAs are best placed to advise them.
Under the rules concurrency will work according to the first graphic link on the right.
Personal Pension or AVC?
One of the key advantages of the PP route is that 25% of the accumulated fund can be taken as tax free cash unlike (post '87) AVCs where tax free cash is not available.
Also, the Personal Pension fund does not count towards maximum Inland Revenue allowable benefits . This means that someone could have a pension of two thirds of final salary plus whatever is provided by the Personal Pension contributions.
It is estimated that 2 million people currently pay £118 million a year in Additional Voluntary Contributions so there is also an opportunity to review these to see whether future AVCs should be directed to a Personal Pension.
In conclusion, the new rules provide a number of additional opportunities for IFAs to advise clients on AVCs now that there are more options and to guide them through this more complicated situation.
We have already seen that 8 million people can potentially benefit from the concurrency rules - the second graphic link on the right provides an illustration of how at a client can have his cake and eat it.
The Benefits of Concurrency for Mr Green
As he earns less than £30,000 and is not a controlling director, he is now allowed to pay up to £300 a month gross (£234 net) into a Personal Pension.
He can also contribute up to 15% of earnings into his occupational scheme or any AVC arrangement and still make his personal pension contributions.
He can take 25% of his accumulated fund as tax free cash from his personal pension arrangement on retirement. This option is not available under a new AVC scheme.
He can enjoy the benefits from his occupational pension plus those from his personal pension.
Concurrency opens up a world of opportunities for pension planning. Have you made your clients aware of these?
How to target concurrency business using worksite marketing.
Experience has shown that face to face employee meetings (either in groups or individually) result in a significantly increased take up rate. Various methods can be used to promote these opportunities and your service to clients. One of the best is worksite marketing.
Worksite marketing is an employer-supported programme where products and services are offered to employees and, in some cases, dependants. The cost is met by the employee, usually through a payroll deduction system, although sometimes subsidised by the employer.
In practice worksite marketing encompasses a collection of ideas and practices, all revolving around distribution of products and services via the workplace. Distribution can be by post, internet, telephone, or face to face.
Worksite marketing is not a new concept. In fact it has been heavily utilised in both 401k pension provision in the US and industry-wide funds in Australia. These models of pension provision have been influential in the development of Stakeholder in the UK.
Worksite marketing has been highly successful in the US for some time. Consider some of these statistics which back this up:
Growth in premiums from sales of individual voluntary health products increased by 28% over a 5 year period while industry sales from all other channels fell by 68%
A survey of 1,000 consumers across the US found that:
* employer sponsored programs produce highest purchase rate per contact
* 56% of consumers attending worksite presentations bought some form of life assurance compared to 25% success rate from traditional agent contacts and 2 -3% from direct mail.
Closer to home, there is significant worksite marketing activity in the Irish financial services industry and for Irish Life & Permanent in particular. Many experts hold up the example of Irish Life & Permanent as the success paradigm. 25% of their overall premium income comes from worksite marketing activity. However, there are conditions for success e.g. about 60% of the Irish workforce have salary deduction facilities. This is unique in Europe.
So utilising worksite marketing and taking the time to put together a marketing plan with the correct support material can greatly enhance your sign up rates.
Here are the 6 key stages in process to marketing concurrency business in the work place environment.
1. Make an impact with posters promoting your services around the workplace.
2. Make people think about their future and raise awareness of your services with postcards which can be mailed or given out to employees.
3. Make maximum use of company pay slips by inserting flyers.
4. Have group meetings with staff ensuring your brand is on prominent display.
5. Personalise invitations to encourage employees to attend group meetings.
6. Ensure you have a presentation using perhaps Powerpoint to maximise the impact at a group meeting.
The implementation of effective worksite marketing techniques will be key to the future success of IFAs in the rapidly evolving financial services market. To this end IFAs, assisted by product providers, must now begin to integrate worksite marketing practices with their traditional distribution methods. Those who fail to take up this challenge risk missing the real opportunity which the introduction of Stakeholder pensions has created.
Now is a good time to encourage members of occupational pension arrangements who qualify for concurrency to pay additional contributions using personal pensions, and to review those with existing AVC arrangements.
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