6th October 2020
Making your financial wellbeing strategy count in difficult times
There have been many recent redundancy announcements and even with the new job support scheme, it sadly seems inevitable that more will be announced over the coming months.
Of those who have a job, many are learning to cope with a reduction in salary (pay-cuts) as a result of reduced work. Many don’t have sufficient savings to fall back on with a recent study by Lane Clark & Peacock finding that almost a third of employees (32%) have less than one month’s savings. It also found that when it comes to their financial health, 49% felt that their employer doesn’t care and could support them more.
Money worries have led to many feeling greater levels of anxiety with concerns that unexpected expenses could tip them over into financial crisis. How employees manage their money and their ability to withstand a financial shock has a direct effect on their financial wellbeing. Learning how to budget and manage debt on a reduced income is crucial during these uncertain times.
WEALTH at work, has outlined some ideas covered in their financial education online seminars on how employees can manage their finances should they be facing a reduced income through redundancy or a change in their salary or because their overall household income has fallen due to a partner suffering lost income.
Employees should review;
- All income – For those who face redundancy or have taken a pay-cut, it is crucial that they work out what their new income will actually be and budget accordingly. They should firstly work out what available savings and assets they have such as; pensions, savings, ISAs, property and investments, and what expenses and liabilities they have e.g. mortgage, debt, childcare, insurance and utility bills. They can then look at any other household income including any salary or their redundancy package. If the amount of money they need each month is more than the amount they have coming in, they will then need to work out what action needs to be taken to cover the costs. The Money Advice Service has a great budget planner: wmoneyadviceservice.org.uk/en/tools/budget-planner.
- All outgoings – Employees should check their bank statements and make a list of what they are spending each month. This will highlight where their money is going and where savings could be made. By getting their finances in order, it may be possible for employees to free up money to pay off any debts or to live off. For example, now is a good time to cancel any subscriptions or memberships that have been forgotten about.
- Mortgage or rent payments – In particular, employees should speak to their mortgage lender or landlord to find out what their options are if they are struggling to make payments. There are some government schemes available and it may be possible to take a mortgage holiday but the deadline for applications is 31 Oct 2020.
- Overdrafts and debt payments – When it comes to overdrafts, credit cards and other debt, lenders are required to provide support to those struggling which will vary depending on your circumstances. If employees are struggling to make repayments, it may be possible to defer them or receive an interest free overdraft, usually up to £500. Importantly, employees should speak to their providers before any payments are missed. If they can afford to do so, it’s always worth paying off expensive debts and those with higher interest rates first. There are many different types of debt with varying rates of interest. Credit cards and overdrafts can have rates of 18-40%, with payday loans having rates of 1,500% and more! For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 a month, with a total interest paid of £3,495. If that monthly payment was increased to £100 a month, the debt would be paid off in three years and four months, and interest paid would be only £908. If this was increased to £300 a month, the debt would be paid in 10 months with total interest paid of £252.
- Pension contributions – It may be tempting for employees to try and save money by reducing or pausing their pension contributions. However, they should plan carefully before doing this because if they can afford to continue making regular investments during a market downturn, more positive long-term returns may be generated.
- Savings on shopping bills – Employees can make significant savings by switching brands on their regular food shop. Discount vouchers are also often available through voucher and discount websites. Employers should also make sure that employees are aware of any discount vouchers schemes available through the workplace.
- Savings on utilities and broadband suppliers – It is possible for employees to save a lot of money by shopping around for cheaper utilities and broadband providers. There are many comparison services out there to help. For example, by shopping around 50% of people could achieve a saving of £338 on their dual fuel energy cost according to comparethemarket.com May 2020 data.
- Leisure activities – It is surprising the amount of money which is usually spent by households on nights out, day trips, holidays and experiences. Now that many of these are not an option, there is a lot of money which can be saved.
- Affordability of retiring – Employees who are planning to retire or who find themselves facing an unplanned early retirement are most probably feeling really concerned if they can afford to do so right now. However, this may be more achievable than they think. Employees may not realise that they could use the tax free cash from their pension to pay off any outstanding loans and mortgages, and without these debts they may not need as much as they think to afford retirement. For example, someone earning £30,000, once they have paid their income tax (£3,020), national insurance (£2,460), pension contributions (£2,400), mortgage (£6,000) and loans (£2,400), may end up with a disposable income of around £13,720 p.a. Realising that you may only need a retirement income of less than half your salary to maintain your standard of living can be an eye opener and make retirement a more affordable and realistic option.
- Making the most of redundancy pay – It’s really important that effected employees understand how to make the most of their redundancy package, particularly those facing retirement. For example, 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. However, what’s right for each employee will depend on their individual circumstances and many will need support navigating their options.
Jonathan Watts-Lay, Director, WEALTH at work, comments; “Many employees are feeling greater levels of anxiety at the moment as they try to make ends meet or realise that their income may be at risk. And of course, those approaching retirement are going to feel the impact of this to the greatest extent.”
He adds; “It is vital that employers take steps to help their workforce take control of their finances during this uncertain period. After all, how companies manage it will have a huge impact on their future reputation and the retention, motivation and productivity of employees.”
Watts-Lay explains; “The best way to do this is through the provision of financial education, guidance and regulated financial advice. Many companies are now seeing the benefit of sourcing specialist providers to help with this and it often forms part of their overall wellbeing strategy.”
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