27 Sep 2019

How to ensure your employees are on track to retire when they want to

Most people find it difficult to envisage their future financial self. While we can look back and see how our values, opinions and knowledge have changed, we usually fail to anticipate how our future self will change. This has implications for our current daily spending, saving and investing decisions, habits and behaviours.

Our primeval brain is wired to favour immediate rewards over deferred gratification. Spending money now provides short-term gain but invariably, for many people, leads to long-term financial pain. Going without now to save money for what seems like the dim distant future is all pain for deferred gain. No wonder most people find saving unappealing.

It’s no surprise that in the absence of a decent workplace pension plan and before the introduction of auto enrolment (AE), retirement saving participation in the UK private sector was very low. Since AE has been rolled out, the proportion of private sector eligible staff participating in a workplace pension has increased sharply from 42% to 81% by 2017, according to The Pension Regulator’s Automatic Enrolment – commentary and analysis (September 2018).

Although they are large expenses, the cost of a home, education or raising a child are relatively small compared to the cost of a decent secure retirement income. To have a retirement income of £20,000 a year, assuming £10,000 a year from state pension, you would currently need a pot of about £415,000 to buy an inflation-linked annuity to provide the additional remaining £10,000 per annum.

But despite the recent increase in employee minimum contributions from 3% to 5%, most employees are still nowhere near saving the 15% of salary that is necessary to accumulate meaningful retirement savings.

The easiest way to help employees improve and maintain their long-term financial wellbeing is to change the language of how you communicate retirement planning, and also to make it easy for them to develop effective and sustainable financial habits.

Communicate effectively

Changing how you communicate retirement saving means making it aspirational, appealing and achievable. Instead of ‘Saving for retirement’ why not try ‘What would like to be doing when you retire?’

And instead of asking the question ‘Are you contributing enough to your pension plan’ you could ask ‘Are you are getting all the free money you’re entitled to?’. Framing retirement savings contributions as a way to get ‘free’ or ‘extra’ money from both the employer and the government sounds like a no brainer, and less about the pain of losing current spending power.

Make it easy

Most people find it very hard to control their lifestyle spending, but this is what they must learn to avoid accruing debt and have enough money to save for both short and long-term needs. Instead of talking about budgeting, we communicate the need to adopt what our head of financial education calls the Smart Spending System.

Smart spending means giving each pound a job before you earn it. This includes making proper allowance for non-essential things that make life more interesting and fun, which is more appealing and sustainable than going on a spending detox. Suggesting that employees make a commitment to use a proportion of future pay rises to increase savings is another small but effective way to help employees make space for savings.

Offering competitive cash flow, borrowing, saving, investing and protection products funded directly from salary will help them to free-up more money to fund their ‘what I would like to be doing when I retire’ fund.

Funding for life after work is expensive and not optional. The key to good financial outcomes is controlling day-to-day spending, being intentional about repaying debt and building short and long- term savings.

This article is provided by Salary Finance.