Financial education – an essential tool for workplace savings & benefits

3rd April 2012

In these challenging economic times, with the introduction of new regulations employers and employees are often overwhelmed. Whether the introduction of auto-enrolment, removal of default retirement age or options at retirement, the considerations are growing and 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 essential for those considering retirement. Employees save for years to fund their retirement income but are often left without guidance at the point of retirement. The end of fixed retirement dates will see many continuing in employment for longer, often opting for flexible retirement where pension income is supplemented by earnings from part-time work.  For those not in a pension already, auto-enrolment will be introduced from 2012. This shouldn’t be viewed by employees as a ‘pay cut’ but instead used to make provision to secure their long term financial well-being.

Another consideration might also be the use of share schemes, as employees often fail to understand them and don’t maximise their value through the integration of workplace savings. For example:

• Capital Gains Tax can be mitigated on Save As You Earn by transferring shares in specie to a Workplace ISA. (subject to annual limits)
• Two lots of tax relief can be obtained on ‘the same money’ by investing in a Share Incentive Plan and then transferring the shares into a pension (subject to annual limits) after 5 years.
• Diversification of Company shares should be considered at maturity to ensure employees are not over-exposed to a single stock.

Information is usually provided through brochures and intranet sites, but can employees really understand how to maximise the offering by simply reading information?

Take an employee benefit like salary sacrifice and Child Care Vouchers (CCVs). If someone is effectively saving £500 on tax and National Insurance (NI) on the vouchers, then (if) as part of the benefits provision the company is also offering a share incentive plan or pension, they can increase the value by putting the £500 saving into either scheme and possibly get a matched contribution from the employer and tax relief.

Using a platform to link a share incentive plan to pension can allow employees to generate a pension pot at little cost where they are awarded matching shares (up to 2:1 with some employers). Furthermore, the shares can be contributed to a pension. With the benefit of two lots of tax relief and employer matching, great value may be achieved.

For most companies, a Workplace ISA is a fantastic benefit, particularly if employees have shares. For example, if the employee is holding stock, they can wrap it in an ISA to protect it from further income and capital gains tax. Yet the price of supplying the Workplace ISA to the employer is nothing.

Employees need to rethink their retirement plans – whether saving towards or taking an income in retirement. Financial education and guidance in the workplace is essential to understand what can be achieved through saving and what retirement income options are available.   In tough economic times it is important to ensure value is being maximised. A financial education programme may hold the key to releasing value.

Please see Employee Benefits online.