Best practice for financial education

24th February 2015

Many employees start with only the most basic knowledge, so an effective financial education strategy is key, says Jonathan Watts-Lay, Director, WEALTH at work in his Expert View with Reward Magazine.

For the smallest companies, with no financial education programmes and few retirees, the guidance guarantee will certainly prove useful as the pensions freedoms came in this April.

However, larger companies are looking to do something far more tailored – in fact many appreciated the need for financial education in the workplace long before the changes to freedoms were introduced.

From this perspective, the guidance guarantee exists as a regulatory element – but paradoxically, is it proving the catalyst for many companies to want to create a dedicated and tailored financial education programme?

Best Practice

A number of issues cloud the approach to workplace financial education – not least the age from which it should start.

A purist would say that from the moment somebody starts work they should get financial education, even if they’re not focussed on retirement or pensions contributions.

However, in our experience, 45 is becoming the new ‘latest age’ you’ve got to start it. It’s a move from the traditional idea of education just a couple of years out from retirement: companies are now making sure people are going on these programmes from an earlier age, so that they understand their savings and know if they’re on track – and then when they reach the pre-retirement phase they can make effective decisions.

Regardless of age group, however, most employees have only the most basic understanding: pensions in isolation are complex enough now, and many have to start at the beginning in the discussion about their investments and contributions.

Now it’s more complicated for people than ever: employees have to think beyond pensions to consider ISAs, shares, deposit accounts and so on. All of these need to be understood as they impact what tax somebody may pay in retirement. Those who get it right may be able to take income way in excess of their personal allowance without necessarily having to pay tax.

Historically, those in defined contribution schemes simply defaulted into an annuity, so didn’t need to consider the overall picture and the implications. When people don’t know about the things they can do, and the impact they have, there is a great risk of making crucial mistakes.

It highlights how important financial education is as we move forward with more and more choices.

Implementation and communication

There are many avenues into financial education; however we believe seminars are by far the best way to deliver it. To explain all of the choices and implications, employees really need that face-to-face interaction so they can get their heads around all the different aspects of their retirement savings.

Different workplace demographics should govern precisely how you communicate the financial education you are offering. Your youngest employees will want very different things and have a very different understanding of the importance of financial education to those employees who are a few years out from retirement.

However, regardless of the demographic, the key is to find the ‘hook’ to market the education to the staff and get their buy-in, by clearly showing them what’s in it for them.

WEALTH at work can help with this: we deliver the financial education, but we also design a lot of the communications to actually get the employees in there and listening to the important messages.

Panic stations?

Of course, this is all helpful if your employees are retiring and making their choices in a few years. Some companies will have employees retiring this year, but no financial education, with April’s new freedoms looming menacingly over them.

So how will those companies address the issue in April, when employees may want to make those choices? Many still don’t know.

However, employers need to be aware that there are three fundamental questions that employees will ask:

1) With no education: What are my options, and what are the advantages and disadvantages? The best way of answering this is through putting education in place as soon as possible.

2) Having had financial education: What choices are right for me, in my personal circumstances? The way forward is through regulated advice, to work through the choices available.

3) Having had regulated advice: I want to do X with my money – how do I implement this? Employers have to decide what choices they are going to allow through their scheme and where their employees can go to implement other choices.

Employers need to be able to answer these questions to stop the pre-April panic. We can help with that, and put something in place in time for when the changes come in. The time to act is now.

To find out more about our services, please contact us.