A financial education programme may hold the key to maximising workplace savings opportunities, says Jonathan Watts-Lay
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 the 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 employees not in a pension already, auto-enrolment will begin to be introduced in October 2012.
This should not be viewed by employees as a ‘pay cut’, but instead used to make provision to secure their long-term financial wellbeing.
Another consideration might be the use of share schemes, because employees often fail to understand them and do not 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 five 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 childcare 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, plus tax relief.
Using a platform to link a share incentive plan to a 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 can be achieved.
A workplace Isa is a fantastic benefit, particularly if employees hold shares. For example, if the employee is holding stock, they can wrap it in an Isa to protect it from further income tax and capital gains tax. Yet the price of supplying the workplace Isa 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.
During tough economic times, it is essential to ensure value is being maximised. A financial education
programme may hold the key to achieving that objective.
Jonathan Watts-Lay is a director at Wealth at Work
Read more from the Workplace Savings Quarterly†