Are your employees facing a reduced household income? How to make financial wellbeing count

Money worries have led to many employees feeling greater levels of anxiety, with concerns that unexpected expenses could tip them into financial crisis. How employees manage their money and their ability to withstand a financial shock has a direct effect on their financial wellbeing. Learning how to budget and manage debt on a reduced income is crucial during these uncertain times.

Below I outline some of the ideas covered in our financial education online seminars on how employees can manage their finances should they face a reduced income through redundancy, a change in their salary or because their overall household income has fallen due to a partner suffering lost income. Employees should review:

1. All income: For those who face redundancy or have taken a pay-cut, it is crucial that they work out what their new income will actually be and budget accordingly. They should first work out what available savings and assets they have. This could include: pensions, savings, ISAs, property and investments. Second, they need to consider what expenses and liabilities they have, such as mortgage or rent payments, debt, childcare, insurance and utility bills. They can then look at any other household income including any salary or their redundancy package.

If the amount of money needed each month is more than the amount they have coming in, they will need to work out what action to take to cover the costs. The Money Advice Service has a great budget planner that can help.

2. All outgoings: Employees should check their bank statements and make a list of what they are spending each month. This will highlight where their money is going and where savings could be made. By getting their finances in order, it may be possible for employees to free up money to pay off any debts or to live off. For example, now is a good time to cancel any subscriptions or memberships that have been forgotten about.

3. Mortgage or rent payments: In particular, employees should speak to their mortgage lender or landlord to find out what their options are if they are struggling to make payments. There are some government schemes available and it may be possible to take a mortgage holiday.

4. Overdrafts and debt payments: When it comes to overdrafts, credit cards and other debt, lenders are required to provide support to those struggling, which will vary depending on individual circumstances. If employees are finding it difficult to make repayments, it may be possible to defer them or receive an interest free overdraft, usually up to £500. Importantly, employees should speak to their providers before any payments are missed. If they can afford to do so, it’s always worth paying off expensive debts and those with higher interest rates first. There are many different types of debt with varying rates of interest. Credit cards and overdrafts can have rates of 18-40%, with payday loans having rates of 1,500% and more!

For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 a month, with a total interest paid of £3,495. If that monthly payment was increased to £100 a month, the debt would be paid off in three years and four months, and interest paid would be only £908. If this was increased to £300 a month, the debt would be paid in 10 months with total interest paid of £252.

5. Pension contributions: It may be tempting for employees to try and save money by reducing or pausing their pension contributions. However, they should plan carefully before doing this because if they can afford to continue making regular investments during a market downturn, more positive long-term returns may be generated.

6. Savings on shopping bills: Employees can make significant savings by switching brands on their regular food shop. Discount vouchers are also often available through voucher and discount websites. Employers should also make sure that employees are aware of any discount voucher schemes available through the workplace.

7. Savings on utilities and broadband suppliers: It is possible for employees to save a lot of money by shopping around for cheaper utilities and broadband providers. There are many comparison services out there to help. For example, by shopping around 50% of people could achieve a saving of £338 on their dual fuel energy cost according to comparethemarket.com May 2020 data.

8. Leisure activities: The amount of money which is usually spent by households on nights out, day trips, holidays and experiences is surprising. Now that many of these are not an option, there is a lot of money which can be saved.

9. Affordability of retiring: Employees who are planning to retire or who find themselves facing an unplanned early retirement are likely to be feeling concerned about whether they can afford to do so. However, this may be more achievable than they think. Employees may not realise that they could use the tax-free cash from their pension to pay off any outstanding loans and mortgages, and without these debts they may not need as much as they think to afford retirement.

For example, once someone earning £30,000 has paid their income tax (£3,020), national insurance (£2,460), pension contributions (£2,400), mortgage (£6,000) and loans (£2,400), they may end up with a disposable income of around £13,720 a year. Realising that you may only need a retirement income of less than half your salary to maintain your standard of living can be an eye opener and make retirement a more affordable and realistic option.

10. Making the most of redundancy pay: It’s really important that effected employees understand how to make the most of their redundancy package, particularly those facing retirement. For example, by using some of their redundancy pay to directly boost their pension savings, individuals can reduce the overall tax impact on redundancy payments above the £30,000 tax-free limit. However, what’s right for each employee will depend on their individual circumstances and many will need support navigating their options.

Many employees are feeling greater levels of anxiety at the moment as they try to make ends meet or realise that their income may be at risk. And of course, those approaching retirement are going to feel the impact of this to the greatest extent.

It is vital that employers take steps to help their workforce take control of their finances during this uncertain period. After all, how companies support employees’ financial wellbeing will have a huge impact on their future reputation and the retention, motivation and productivity of employees.

The best way to do this is through the provision of financial education, guidance and regulated financial advice. Many companies are now seeing the benefit of sourcing specialist providers to help with this and it often forms part of their overall wellbeing strategy.

The author is Jonathan Watts-Lay, Director, WEALTH at work.

This article is provided by WEALTH at work.