Blending workplace savings and pensions for different age groups and different needs

The impact of Covid-19 has left an indelible mark on the fabric of society. It’s impacted almost every part of our lives, including our finances. Employees who were relatively financially stable before the pandemic have found themselves struggling as household incomes have been rocked by pay-cuts or worse still, redundancies. The insufficient levels of emergency savings to fall back on have revealed a naivety around our own financial security and understanding of the basics.

But perhaps this is the shock that many need to kickstart a new attitude towards money. Just as in the wake of the financial crisis in 2008, where we saw savings levels start to rise, and debt levels reduce, people are once again seeking to get a firm grip of their finances.

Attitudes too are changing; no longer is money a taboo topic of conversation, but rather, talking about money is now positively encouraged. The challenge for many however will be in knowing where to find the help, support and information to take back control. The good news is that many employers, prompted by the pandemic, are stepping up efforts in providing financial wellness programmes alongside national campaigns like the recent Talk Money Week.

The moments that matter

The Money and Pensions Service’s Building the UK’s financial wellbeing in the light of Covid-19 (Nov 2020) report, recognises that there will be long-term ramifications from this year’s crisis that will impact the financial wellbeing of employees for years to come.

Its recommendations include encouraging conversations around the key ‘moments that matter’ in employee’s financial lives. In this regard, employers are uniquely positioned. Most of life’s key events occur while in the workplace; starting work, changing jobs, becoming parents, seeing children off to university and yes, preparing for retirement. All these life events have financial implications and so the provision of timely help and support is essential if we want to empower employees to navigate these key financial moments well.

Multiple workplace savings options – essential for financial wellbeing

Every employee throughout every organisation has a need to save, but not every employee will prioritise saving for retirement over shorter-term goals. Yet workplace savings have historically focussed solely on the pension. While an early start to pension saving is to be lauded, (and now mandatory thanks to auto-enrolment), those in their 20s and early 30s will almost certainly have shorter-term savings priorities like paying off debt, or building up a deposit on a house.

Those in their mid-30s to mid-40s maybe more focussed on mid to long-term saving, perhaps for university or school fees. But financial wellbeing will only truly be a reality when employees have access to the right information and tools along with a range of workplace savings products that allow them to take control of their finances at every stage of life.

Employers should therefore look to implement a wider workplace savings solution than pension alone. But it needs to be backed up with jargon-free information, tools and support to help employees use those products appropriately – the two are inseparable. You can have the best products in place, but without the right information and support, employees will not understand their relevance. Equally you can provide the most engaging information, but if you’re expecting employees to walk up the high street or search online to find the relevant product providers, you shouldn’t be disappointed by minimal take-up. A better solution is to provide multiple savings products via payroll where you have the visibility to see how employees are saving, and the ability to test and modify the effectiveness of your financial wellness strategy over time.

To cater for a broad array of savings scenarios, employers should be looking to provide contributions via payroll into short, medium and long-term saving vehicles. At the very least, that translates into a workplace ISA and a workplace pension. Access to a Lifetime ISA as well as a general investment account is also preferable to cater for those who are saving to buy their first property and for those impacted by pension restrictions respectively.

Financial education is key

Without understanding, there can be no appreciation of the benefits that are offered to employees and consequently, employers will experience poor value for money. Financial education however, is the key that unlocks understanding and an increased appreciation of the benefits you offer.

Delivering seminars on a range of financial topics empowers employees to take action and ensures that you’re addressing the needs of all staff. If you’re unsure of what topics to cover – ask them. There are many online survey tools that can help you gather that vital information. Addressing the issues of your staff will result in far higher levels of participation.

Despite wide generational variation in the way we like to receive communications (email, text, phone, letter) when it comes to financial decision-making, every generation prefers face-to-face support. Online tools and calculators can certainly get the wheels in motion, but the ability to speak to an expert in person (or via Zoom) is often the catalyst that leads to real behavioural change.

What does good look like?

Take the two following examples. Though fictional, they are designed to show the value of a well-rounded approach to personal finances and are a typical representation of HL Workplace clients. They are not a recommendation for a particular course of action. Tax benefits depend on individual circumstances and rules can change.

Jane – age 27

Jane is 27 and is auto-enrolled into her company’s pension. The company offers a matching scheme of between 5% to 10%. She’s considering paying a bit more into her pension but her main priority right now is saving up for a deposit on a house. She attends a 1-2-1 meeting with a workplace savings specialist, and makes a few key decisions.

She completes an online transfer to consolidate her old pension with the new scheme.
She decides that she can tolerate a little more risk on account of her age and so switches her investments to something more adventurous that may give her higher returns.
She decides to keep her pension contributions at 5% for the time being, but she decides to pay 5% of her salary into a Lifetime ISA alongside her pension. Her contributions attract a 25% bonus from the government, helping her reach her goal quicker. She’ll consider increasing her pension the next time she gets a pay rise.
She sets up online access so that she can manage both pension and ISA online and via a mobile app.

Tony – senior executive

Tony is a senior executive at the company and faces restrictions due to the tapered annual allowance. He’s contributed as much as he can to his pension, and the company have offered him a lump sum cash payment in lieu of the employer contributions that he can no longer contribute to his pension. Rather than spend the cash, he makes a couple of alternative decisions:

He decides to pay the cash in lieu into a general investment account via payroll.
He then transfers some of the money to top up his ISA and the remainder he uses to fund his wife’s ISA, which ensures maximum tax efficiency. The money will be used to supplement his pension income, and unlike the pension, free from further UK tax.

A holistic financial wellbeing strategy enables employees to better understand their financial goals and shortfalls and take steps towards them.

The very act of starting a savings habit both increases resilience and the ‘future focus’ of savers. It’s often enough to evaporate much of the financial worry that leads to stress, even if the eventual goal is still some years off. The knowledge that they are on course for a better financial future results in happier, more engaged and more productive employees in the present.

The author is Alastair Stuart-Hunt, corporate consultant at Hargreaves Lansdown.

This article is provide by Hargreaves Lansdown.