An array of savings vehicles is available to employees, and education is needed to ensure they understand the full benefits, says Jonathan Watts-Lay, director of Wealth at Work
Employees have more control over their savings than they have ever had before. And, with the introduction of new regulations and the additional workplace savings choices that are available to them, is it not time to view savings holistically and rethink retirement savings?
However, we believe that many employees are not utilising their workplace savings in the best way to achieve their financial goals.
Employees need to understand the wealth creation opportunities available to them by virtue of their employment and how these may be combined to provide significant benefits by using a flexible savings platform, otherwise known as the corporate wrap.
However, without the appropriate financial education, employees may not seize this opportunity, with the result that both short-term and longer-term retirement savings will suffer.
Many employees now have access to a variety of workplace savings vehicles, such as a workplace individual savings account (Isa), share schemes and pensions including a workplace self-invested personal pension (Sipp). Such variety allows an employee to choose a savings vehicle, or combination of vehicles, which are the most appropriate for them at a given point in time, to satisfy their own personal short-, medium- or long-term savings goals.
For example, a 25-year-old employee may prefer to prioritise accessing cash and focus on short-term savings vehicles, such as sharesave or save-as-you earn schemes that they pay into for three or five years. A sharesave scheme is a cash investment with the potential to buy shares in the future, so, with the benefit of hindsight, these have potential upside and no real downside risk. This may be combined with perhaps saving into a workplace Isa and a minimum amount into pension. But, as priorities change through life, employees can flex how their
contributions are distributed between short-, medium- and long-term savings.
Employees may also benefit from utilising the flexible savings platform by linking their workplace savings together. For example, by linking share schemes with a workplace Isa, participants could mitigate some, or all, of the capital gains tax that may arise on the sale of the shares. Any shares or value held within a workplace Isa then remain accessible, unlike a pension, which can be accessed only at retirement.
There are also benefits from linking share schemes with a workplace Sipp. For example, employees taking part in a share incentive plan (Sip) can transfer shares in-specie to benefit from two helpings of tax relief, firstly on the acquisition of the shares, and secondly on the transfer of the shares to a workplace Sipp. The key issue with all of this is that employees need to receive financial education in the workplace to understand what the benefits are, how they can be achieved and, consequently, make informed decisions. The flexible savings platform is merely a utility. If employees fail to understand the value they can derive from it, it will not be used. Their goals may
change throughout their life or as their financial circumstances change, but education is the key to understanding how this process evolves.
Education is also vital around diversification of company shares because this is a vital part of any good flexible savings platform. We have seen several occurrences where employees have held a large quantity of stock in their company, which lost significant value through market pressures. Share schemes are important because they align the performance of the business with individual rewards, but employees should take care not to put all their
eggs into one basket. They should understand the importance of diversification to help safeguard their
savings and minimise their investment risk.
Click on the links below for more sections:
Retirement savings: Investment choices
Retirement savings: Choosing a fund manager