Education holds the key to realising full value of savings

5th March 2012

“In these challenging economic times, with the introduction of many new regulations such as auto-enrolment, removal of the default retirement age and enhanced options at retirement, employers and employees are often overwhelmed with the vast considerations which critically need to be understood.

Together with insufficient retirement savings, over indebtedness and a general lack of knowledge – employees have a pressing need for financial education in the workplace. This is of special concern for those considering retirement. Employees save for many years to fund their retirement income but are often left without any guidance at the point of retirement. This is especially important as the decision an individual makes at retirement is probably one of the biggest financial decisions they will ever make in their life.

The end of fixed retirement dates will see many employees continuing in employment for longer, often opting for flexible retirement where pension income is supplemented by earnings from part time work.

In a recent survey*, 67% of employers agreed that the removal of the default retirement age will see a significant number of employees choose to work longer. This could be in order to enhance their retirement savings which is an inevitable outcome; given that the evidence suggests that many are not saving enough for their retirement. Indeed, only 21% of employers believe their employees are saving enough for retirement.

For those not in a pension already, auto enrolment will be introduced from 2012. This should not be viewed by employees as a ‘pay cut’ but instead it should be used to make essential provision to secure their long term financial well-being. This is where financial education is paramount in order to understand the importance of saving for retirement.

Employees will have varying circumstances which are likely to result in different savings priorities. Whilst pensions are likely to remain part of a longer term savings strategy and share schemes a medium term savings strategy, the Workplace ISA can be a more flexible savings choice.

With the benefit of financial education, the integration of workplace savings such as share schemes with pension and Workplace ISA can prove beneficial. For most companies, a Workplace ISA is a fantastic benefit to offer, particularly if employees already have shares. For example, if the employee is holding stock, they can wrap that stock in an ISA to protect it from further income tax and capital gains tax. Yet the price of supplying the Workplace ISA to the employer is nothing.

Creating value is especially important in the ‘accumulation’ phase of saving, leading up to retirement – to build up the largest retirement pot possible.  Employees need to rethink their retirement now. Whether saving towards or taking an income to live in retirement – it is essential that employees receive financial education and suitable guidance in the workplace to understand their choices, what can be achieved and consequently make informed decisions. In tough economic times it is important to ensure value is being maximised from workplace savings and financial education holds the key to releasing that value.”

*WEALTH at work Rethink Retirement Survey Results 2011

Please see Employee Benefits Financial Education Supplement – March Issue to read more.