Making savings work hard pays healthy dividends

The work­place pen­sion is the only ben­e­fit where staff get free mon­ey from their employ­er. It also offers the best income tax and nation­al insur­ance sav­ings. Yet few peo­ple grasp this, part­ly due to lack of under­stand­ing.

In cash-strapped times, employ­ees need to con­sid­er their sav­ings as much as their spend­ing. As Stephen Bowles, head of defined con­tri­bu­tion pen­sions at Schroders, says: “If employ­ees are going to save, then they want to work that sav­ing as hard as they can.”

Some employ­ers, such as Marks & Spencer, Eli Lil­ly, First­Group and BT, already help staff make the right deci­sions on work­place sav­ings prod­ucts, such as pen­sions, share schemes and cor­po­rate ISAs. The gov­ern­ment encour­ages this and backs the Mon­ey Advice Ser­vice (MAS) which goes into work­places to run free one-hour finan­cial work­shops for staff.

The Nation­al Asso­ci­a­tion of Pen­sion Funds (NAPF) is also keen to help employ­ers edu­cate staff. Its PENSIONSFORCE ser­vice offers work­shops, a web­site and a short video enti­tled The Long Week­end, aimed at rais­ing aware­ness about the impor­tance of plan­ning and sav­ing for retire­ment.

Employ­ers can edu­cate staff them­selves, but need to beware of giv­ing finan­cial advice. “What employ­ees real­ly want is to be sign­post­ed to where they can get the infor­ma­tion they need, have what invari­ably seems com­pli­cat­ed explained or receive help with iden­ti­fy­ing the choic­es avail­able to them,” says PENSIONSFORCE’s man­ag­er Frances Cor­bett. “These are all areas employ­ers can com­fort­ably cov­er with­out stray­ing into the realms of finan­cial or invest­ment advice.”

Those employ­ers want­i­ng to stay hands-off while sup­port­ing staff could bring in a reg­u­lat­ed finan­cial advis­er. This is more cost­ly, with the typ­i­cal advis­er cost­ing £200 an hour and need­ing sev­er­al hours to meet with and research options for new clients. But if an employ­er keeps expen­di­ture on finan­cial advice for staff to below £150 per employ­ee per year there will be no ben­e­fit-in-kind tax to pay.

An alter­na­tive option is to offer staff web or intranet-based infor­ma­tion. Many employ­ee ben­e­fits providers offer online edu­ca­tion and finan­cial cal­cu­la­tors as part of their ser­vice. These allow staff to mod­el sav­ings options and show them how to use pen­sions, share plans or ISAs togeth­er to poten­tial­ly boost sav­ings or reduce income tax, cap­i­tal gains tax or nation­al insur­ance.

Giv­en the belt-tight­en­ing times we live in, employ­ers may ques­tion why they should both­er to offer employ­ee sav­ings of any sort, nev­er mind sup­ply the finan­cial edu­ca­tion to go along with it.

Leg­is­la­tion is one rea­son. Employ­ers will have to auto­mat­i­cal­ly enrol all staff into a pen­sion at some point, as Nigel Fer­ri­er, direc­tor of Fer­ri­er Pearce, points out. “I would not under­es­ti­mate the cost of the fall­out if staff don’t under­stand auto-enrol­ment,” he says. “Try­ing to explain to an employ­ee that they can­not have their con­tri­bu­tion back when they realise too late that they do not want to be in the scheme will very quick­ly turn most employ­ers from Robin Hood into the Sher­iff of Not­ting­ham.”

Since Octo­ber 2011, when the default retire­ment age was scrapped, employ­ers have not been allowed to force staff to retire, so in the near future organ­i­sa­tions could find them­selves deal­ing with poor­ly per­form­ing staff, who may well want to stop work­ing them­selves, but who can­not afford to retire.

What employ­ees real­ly want is to be sign­post­ed to where they can get the infor­ma­tion they need

A bit of finan­cial edu­ca­tion ear­ly on could mit­i­gate such sad cas­es. Michael Whit­field, chief exec­u­tive of Thom­sons Online Ben­e­fits, says: “We have seen new clients come to us with pen­sion take-up of under 50 per cent and few, if any, employ­ee con­tri­bu­tions being paid, despite employ­er con­tri­bu­tions being in excess of 10 per cent.

“Yet con­verse­ly we have clients pay­ing 5 per cent where the take-up is in excess of 80 per cent and where near­ly every per­son pays their own con­tri­bu­tion on top of the employ­er con­tri­bu­tion. Why is that? The answer is sim­ple: the bet­ter, and more reg­u­lar, the com­mu­ni­ca­tion, the more employ­ees engage, and the more they take own­er­ship and val­ue what their employ­er con­tributes on their behalf.”

Pair the leg­isla­tive sticks with the car­rot of nation­al insur­ance sav­ings for the employ­er on pen­sions and some employ­ee share schemes, and a strong busi­ness case for edu­cat­ing staff on work­place sav­ings begins to emerge. Finance direc­tors and their HR coun­ter­parts should take note.

CASE STUDY

BT calls up share plans

Telecom­mu­ni­ca­tions com­pa­ny BT offers its staff pen­sion ben­e­fits and two types of share plans. These allow staff to buy BT shares with tax relief out of gross salary and save for three or five years to buy shares at a dis­count to mar­ket price with a tax-free gain.

BT goes to great lengths to edu­cate staff about these sav­ings choic­es and oth­er finan­cial mat­ters. “We recog­nise that BT peo­ple want choice and flex­i­bil­i­ty with ease of imple­men­ta­tion,” says Fran­cis O’Mahony, head of employ­ee share plans. “The large num­ber of par­tic­i­pants select­ing dif­fer­ent choic­es, com­bined with feed­back, showed that the qual­i­ty, quan­ti­ty and tim­ing of com­mu­ni­ca­tions enabled our peo­ple to make an informed choice.”

Sem­i­nars on effec­tive tax plan­ning were espe­cial­ly use­ful when BT’s share­save plan matured this August, yield­ing gains for around 20,000 peo­ple, while the busi­ness also offers ses­sions on finan­cial plan­ning for future inde­pen­dence, encour­ag­ing staff to align their finances with life plans.

The workplace pension is the only benefit where staff get free money from their employer. It also offers the best income tax and national insurance savings. Yet few people grasp this, partly due to lack of understanding.

CASE STUDY

BT calls up share plans