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.


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.