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07 Apr 2022

5 key building blocks to better employee financial resilience

Pensions can be used alongside other workplace savings to support employees

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Many pension providers offer different ways for clients and members to save and invest.

Accounts like an ISA to hold stocks and shares, or a general investment account can help build financial resilience. By investing savings in the stock market, they have the opportunity to grow over time.

Investing is a powerful tool, but it’s not the only way to build financial resilience. Our experts have provided five key building blocks, what we’ve called ‘Five to Thrive’, for individuals to consider when reviewing their finances.

In order of priority, these are:

1. Control debt

2. Protect yourself and your family

3. Save a penny for a rainy day

4. Plan for later life

5. Invest to make more of your money

Investing gives individuals the chance to make their money work harder, but it’s the last part of building financial resilience. Once the other steps are sorted, focusing on investing could improve future financial security.

Many savers don’t realise that investment accounts, like those mentioned above, can be offered by their employer, through what’s known as ‘workplace savings’.

Workplace savings

Workplace savings allow employees to make regular payroll savings directly from their wages.

This means employees’ money is saved into an alternate savings and investment account of their choosing, rather than paid into a bank account. This happens automatically whenever they’re paid.

Sidecar savings – a new way of looking at emergency cash?

Automatic enrolment into workplace pensions has been an extraordinary success, with over 90% of eligible private sector workers now members of workplace pension schemes.

However, could automatic enrolment affect the ability of an employee to cope in an emergency, particularly for those with little to no savings?

Sidecar savings is a new concept where an instant-access savings account is tied to a pension. However, unlike a pension, savers can access their money if they need it.

Essentially, an employee makes savings into a sidecar account up to a specified limit. Once this limit is reached, extra savings are diverted into the pension on top of contributions. If a person withdraws money from the sidecar account, contributions are restored into this account until the limit is reached again.

A House of Commons briefing paper states that this concept could ‘help certain groups overcome barriers to retirement savings caused by pressures from the cost of living’.

This is due to the fact that employees would have instant access to some of their money only if they need it, compared to normal savings accounts where there can be a higher temptation to spend.

A sidecar savings account may also give individuals more control over part of their savings if they need their cash for an emergency. Pension savings cannot normally be accessed until age 55 (57 from 2028), so sidecar savings could be a credible option for those who want a savings buffer.

How might workplace savings affect different age groups?

The age-restricted access to pension savings can mean that individuals feel less inclined to contribute large amounts of their monthly salary towards retirement.

In fact, there was a significant increase in the amount being withdrawn from pensions between April and December 2021. This trend could be attributed to the pandemic and soaring inflation, among other factors.

Factors such as the pandemic and rising inflation tend to affect those on low and middle incomes most. Saving into alternative accounts through payroll can be an important step to helping such employees improving their financial wellbeing.

Many providers offer payroll access solely to general investment accounts. However, if employees are looking for a tax-efficient way to invest, a workplace ISA is a great way to do this.

Workplace savings can also help those on higher incomes whose pension entitlement may be affected by the annual or lifetime allowance. In these circumstances, pension contributions can be redirected to a workplace ISA or fund and share account, encouraging members to save and invest the additional pension entitlement.

But earning more isn’t an automatic pass to financial resilience and security. Running a household with higher spending and debt can result in higher earners having less resilience if their circumstances change.

Whatever its form, workplace savings is a win-win for both the employer and employee.

Employers can increase the financial resilience of their employees by fine-tuning their benefits package. Employee financial worry and stress are reduced. Employees appreciate a more-balanced benefits package, which can in turn improve staff retention levels.

This article offers information about saving and investing, but not personal advice. If you're not sure which investments are right for you, please request advice. Please note that investments can go down as well as up in value, so you may get back less than you invest.

In partnership with Hargreaves Lansdown

Welcome to HL Workplace - savings & investments your employees can understand, engage with, and value.

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