The Value of Financial Education

1st November 2013

Jonathan Watts-Lay, Director, WEALTH at work, comments in Reward on the importance of financial education.  Watts-Lay comments “Financial education is about helping employees understand how to drive the most value from their benefits. Pay rises are still minimal and there’s a real need to put money into employees’ pockets and help them to derive the most value from their salary.

One way of doing this is to help employees link their benefits together more effectively. Three examples of this could be:

• Encouraging employees to use shopping vouchers via voluntary benefits which may provide a 5% weekly saving that can then be paid into the pension scheme, where it will also attract tax relief and perhaps a matching contribution from the employer
• Taking advantage of tax efficient all employee share schemes such as Save As You Earn and Share Incentive Plans and ensure future value can be driven by offering to transfer the shares on maturity into pension and or a workplace ISA. This has the benefit of potentially protecting savings from tax and also allows the employee to diversify so they do not hold too much value in one stock Using salary sacrifice benefits such as childcare vouchers to help employees save tax and National Insurance on the costs of looking after children. That extra money saved could then be put into tax efficient workplace savings such as pension and ISA.

Helping employees to get the most value from their benefits is just one of the reasons for offering staff financial education.  Another area might be to mitigate risk – for example, if an employee has a significant amount in his/her Company shares  relative to their overall earnings, that could represent a risk to their savings, should the company begin to struggle.

As employees approach retirement, there are some other areas that they may need some support with.  Many will be concerned about how much money they will have in retirement, but that’s not just about their current company pension. It’s also about pensions from previous employers as well as other assets, such as the value of company shares, ISAs and value in property.  Understanding all the ways to generate income from pension and savings is critical if that income is to be maximised. Annuities are not always the answer but if considering an annuity understanding how they work is vital. Buying an annuity is generally a one-off decision and cannot be reversed – effectively it will determine how much an employee has to live on throughout their retirement. Health conditions and lifestyle factors (such as smoking) affect the amount of income an employee receives in retirement quite significantly, but many retirees fail to take advantage of  so-called enhanced annuities which will increase their income.

The benefits of financial education aren’t just for the employee. There are advantages for the business as well:

• Ensuring employees are able to retire at a suitable point in their working life.
• Making sure that higher earning employees are aware of tax limitations on pension savings (lifetime and annual limits)and that they plan accordingly to avoid a heavy tax bill at a later date.
• Some employers also view financial education as part of their CSR (corporate, social responsibilities) remit.

There has been a shift in thinking about the role of regulated advice in the workplace as well.  Employers are increasingly believing that at certain points employees really do need advice.  For example, buying an annuity is a decision that will stay with an employee for the rest of his or her life – should that be done without regulated advice?”

Please see Reward to learn more.