Buyers guide to financial education.

1st July 2013

The financial world has changed considerably in the last few years with many employers stating that it’s down to the employee to decide from the benefits on offer, which ones are right for them and how to maximise their value. The example so often quoted is, the move from defined benefit to defined contribution schemes where the employee now needs to decide how much to contribute, which funds to invest in and ultimately how to turn it into income but in fact it applies to many benefits.

For example, is saving into the company pension better than a Workplace ISA or share scheme? Which is most tax efficient or provides the best value? Also, it’s fine to say, ‘save more into pension’ but can employees afford it? Can other benefits help with that affordability? For example, by utilising salary sacrifice for child care vouchers, the tax saving can be put into pension and possibly benefit from matching and further tax relief. Also, utilising shopping vouchers via voluntary benefits can provide say a 5% saving on the weekly shop. All this could help fund future savings, whether it’s the company pension, ISA or share scheme.

However, an employee must learn how to do this. So, how can it be achieved?

A financial education programme can be provided to employees on a segmented basis, based on life-stage, targeted specifically at those in the early years, the midst of their career or those considering or at the point of retirement.

Early career seminars can provide insight on how to save money by utilising existing benefits such as a Workplace ISA or share schemes. Whilst mid career seminars may focus more on what has already been saved and how this can be enhanced to achieve longer terms needs such as retirement income.

Seminars provided in the lead up to retirement are also crucial as understanding how pension, share schemes and other savings may contribute to retirement income is imperative. Choosing the most suitable retirement income option is probably one of the biggest financial decisions anyone will ever make and a wrong decision could have devastating consequences to their personal finances in retirement.

Recent figures show that half a million people will buy an annuity this year* but annuities are not the only option. It is important an employee considers all of their options such as; annuities in their various shapes, income drawdown or a combination of both including phased retirement.

From a retirement survey conducted by WEALTH at work amongst some of the largest companies in the UK** it was revealed that employers believe that only 18% of employees are aware of the various retirement income options available and as few as 13% are aware that they no longer have to purchase an annuity.

With the benefit of financial education, all retirement income options may be discussed with the advantages and disadvantages clearly explained.

For some, the purchase of an annuity is the correct decision but all factors need to be considered. For example, the completion of medical and lifestyle questionnaires could result in significant income enhancements. For others, income drawdown can provide a more flexible way of providing income whilst potentially leaving capital to a spouse or partner upon death. For many, it will be appropriate not to make a single decision at the point of retirement but to constantly review the best way to generate income as they progress through retirement. For example, for some people drawdown may be more appropriate in the early years of retirement with annuities playing a bigger part later on.

Therefore, financial education needs to be supported by advice to ensure employees not only make the correct decision when generating retirement income but continue to have support throughout retirement. It’s unsurprising that recent research** also revealed that 71% of employers believe there will be an increased requirement for specialist advice at retirement.

It’s clear that if employer sponsored benefit programmes are to be successful in delivering real value for employees, financial education is crucial whether at the beginning or end of an employee’s career.

Please see Employee Benefits to learn more.

* Ros Altmann website

**WEALTH at work Rethink Retirement Survey – December 2012

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