Reaching out in a changing environment.

1st October 2020

Around 9.6 million  jobs, from 1.2 million different employers were furloughed in the UK as part of the government’s job retention scheme[1]. With much of the workforce financially affected by Covid-19, providing financial education and guidance has never been so important, especially for those considering retirement. Jonathan Watts-Lay, Director, WEALTH at work answers some key questions surrounding this.

Why is financial education and guidance so important right now?

Financial education and guidance is beneficial to the financial wellbeing of employees and pension scheme members regardless of the climate. However in times like these, when individuals are extremely concerned about their finances, they are perhaps more likely to make knee-jerk decisions which could have a lasting impact on their retirement income.

For example, due to the adverse impact the crisis has had on household income levels, there is the risk that members will see their pension as a way of supplementing their income before actually retiring. The pensions industry has a duty of care to ensure that members have an understanding and awareness of the implications of early withdrawal and the potential risks involved.

Financial education and guidance can help members understand the tax implications of their decisions and explain the other options available to help manage money when household incomes are under severe strain, such as reducing costs through debt repayment deferrals. It can also help members look at alternative savings which may be more appropriate to access than their pension.

Not only this, financial education can also help individuals understand the risks surrounding pension scams. The FCA’s latest figures indicate that pension savers have claimed that over £30 million has been lost to scams since 2017. This is particularly concerning at the moment as unfortunately, fraudsters see turbulent times like this as an opportunity to con savings from pension scheme members. In July, Action Fraud reported that victims of coronavirus-related scams had lost over £11million, with it previously stating that pension scams had been among the most common type of fraud during the crisis.

We know that once an individual has received financial education and/or guidance, they become aware of many of the complex issues they need to understand regarding their pensions, general savings, tax, and so on. In doing so, many realise they need regulated financial advice to make informed decisions.

With the furlough scheme due to end in October, it’s an inevitable and unfortunate fact that redundancies will be unavoidable. The National Institute of Economic and Social Research (NIESR) has predicted that 10% of the UK workforce could be unemployed by Christmas. Providing financial education to those affected is crucial as it can help them to understand their benefits when leaving employment and explores the ways in which to support day-to-day finances during what may be a very difficult time. It can also help them to understand how to avoid common tax mistakes and how to make the most of their redundancy pay.

For example, particularly for those nearer retirement, by using some of their redundancy pay to directly boost their pension savings, individuals can reduce the overall tax impact on redundancy payments above the £30,000 tax free limit. Also, many individuals aged 55 and over don’t realise that they could be better off looking at other taxable savings and investments as a source of income, rather than the tax-free environment of their pension. This would allow their pension savings to benefit from a longer period untouched in a tax free environment.

What are some of the best ways to provide financial education and guidance?

Financial education and guidance can be delivered in a number of ways but social distancing rules have meant that many employers have had to adapt to this changing environment.

What can be done to alleviate some financial worry?

For many, the strain that the pandemic is having on household budgets is a time of worry, anxiety, uncertainty and stress. It’s well known that financial worries cause increased levels of stress and absenteeism amongst employees, and that it leads to lower productivity.

It is vital that employers take steps to help their workforce take control of their finances during this uncertain period. How companies manage it will have a huge impact on their future reputation and the retention and motivation of remaining employees.

Increasing numbers of employers are putting financial education programmes in place to help their employees understand the various issues surrounding their finances, as well as one-to-one financial guidance or regulated financial advice for those who need more support.

Many employers are unable to offer this support themselves, hence the need for specialist providers. These providers can help employers to develop a strategy that is tailored to their organisation. Not only can this help employees feel financially secure but it can also drive improvements in employee engagement, productivity and retention.

[1] https://www.gov.uk/government/publications/coronavirus-job-retention-scheme-statistics-august-2020/coronavirus-job-retention-scheme-statistics-august-2020

https://www.fca.org.uk/news/press-releases/pension-savers-claim-over-ps30-million-lost-scams-regulators-urge-footie-fans-show-scammers-red-card

https://www.ftadviser.com/pensions/2020/06/08/regulator-repeats-anti-scam-warning-as-5m-lost-to-fraud/