Jonathan Watts-Lay, WEALTH at work, on making workplace savings flexible and developing the savings habit
Workplace savings are no longer just about pensions. For some time there has been
an increasing desire to offer employees’ greater savings flexibility. A single savings choice
designed with only retirement in mind does not serve the needs of employees with differing savings
priorities relating to individual life stages and events. The well publicised change to pension tax
relief has created an additional need to offer alternative savings choices beyond the core pension
offering.
As a consequence, many companies have been prompted to reassess how they present and deliver
their employee savings choices and in many cases look to completely restructure existing benefits.
Most intend to have any alternatives in place ahead of April 2011, from which point it now appears
a reduced annual allowance for pension contributions of £40,000 will apply.
The change to the annual allowance, together with the prospect of anti-avoidance legislation
restricting the use of unapproved savings arrangements, means that any restructuring will now
reinforce the value of share schemes as a savings alternative and introduce a new choice in the
form of an individual savings account (ISA), commonly referred to as a
Workplace ISA. Both are potentially valuable to all employees, not just those
senior employees likely to be affected by the reduced annual allowance.
Personal circumstances
The introduction of flexible savings provides the solution, bringing together a variety of
savings choices. A pension should, of course, remain an integral part, yet other choices may
encourage employees to develop a savings habit. The savings vehicles required in support of the
short, medium and long term can be wide ranging. Employees will make their selections in much the
same way as they would for a flexible benefits arrangement – making their choices based on personal
circumstances.
The short term (up to five years) is likely to consist of a cash ISA or a savings account
providing accessibility to meet more immediate spending needs such as saving for a holiday. The
medium term (five to 15 years) may include the opportunity to participate in all employee share
schemes, save as you earn or a share incentive plan. A stocks and shares ISA will also add value.
These choices may be useful for those saving for children to fund education fees, for example.
The long term (15 years or more) will remain as pension with the ultimate objective of
supporting financial well being in retirement. The pension arrangement itself needs to be flexible,
in terms of contributions, the investment choices available and the income options available when
benefits are taken.
Increased interest
Each of the savings vehicles in support of the short, medium and long term elements should be
fully integrated within the workplace and not merely the same products employees can access on the
high street. Companies will use their purchasing power to negotiate favourable terms.
This is especially true given the increased interest in the
Workplace ISA. The
Workplace ISA should be linked to payroll, enabling regular deductions from pay.
It should also facilitate in specie transfer of shares from all employee share schemes.
Engagement essential
Securing employee engagement is essential to the success of flexible savings. Individuals must
understand the opportunities available to them, their potential value, the longer term benefits and
above all the dangers of not taking ownership of their financial future. Effective communication and
financial education will help achieve this, together with access to the appropriate tools and
modellers so employees can learn more about their new flexible savings benefit.
Jonathan Watts - Lay director of
WEALTH at work comments:
"Individuals must understand the opportunities available to them, their potential value, the
longer term benefits and above all the dangers of not taking ownership of their financial
future."
In a nutshell
- workplace savings are no longer just about pensions
- flexible savings bring together a variety of savings choices
- a Workplace ISA allows for in specie transfer of shares.
Please see the 'workplace savings are no longer just about pensions' PDF attached.
