Why is financial wellbeing a priority for UK employers and employees?
Financial capability in the UK is sadly at a low level and this is having a significant impact on people’s lives, with knock-on effects both for their health and financial wellbeing as well as UK productivity.
Our research, conducted in partnership with the Centre for Economics and Business Research (CEBR) has shown that a staggering 4.2 million days have been taken off work as a result of financial concerns, costing employers £1.56bn a year through absenteeism and presenteeism. It also found that one in three employees are living with sustained financial challenges.
What strategies can employers adopt to improve employees’ financial wellbeing?
Financial guidance, and for those that can afford it, advice, are a great way to help employees get their finances in better shape. Budgeting is a real problem – for many people running out of money before their payday is the biggest issue they face. Ideally budgeting should be taught in schools, but the reality is not everyone entering the workforce has these skills.
One of the first things employers can do to plug this gap is help their employees manage their money better. The next step is to help them develop savings habits – for short, medium and long term needs. Auto-enrolment is a big help in getting people into the pension saving habit, but employers, supported by providers and advisers, could do more to raise pension awareness and engagement by signposting employees to guidance and financial advice.
When is the best time to target employees with financial advice and guidance?
Access to financial advice and guidance is increasingly important to pension savers because decision-making post pension freedom has become more complicated. Over 10 million employees have been auto-enrolled into workplace schemes, many into master trusts. Master trusts are the fastest growing sector in workplace pensions, covering a range of employees, many of whom who would benefit from guidance and financial advice.
There are key moments in an employee’s working life when financial advice, education and guidance are particularly relevant, and therefore more effective. The most obvious period is the countdown to retirement, where people need to understand what pensions and other savings they have and how to draw them to ensure they don’t run out of money in later life.
In a worst case scenario they could end up paying almost half their pension to the taxman if they draw their benefits in an inefficient way. Or they could end up in unsuitable products or paying high exit penalties if they access certain products at the wrong time.
The period 10 or 15 years before retirement is another key moment, when people are old enough to feel retirement is within touching distance and needs to be prepared for. This cohort will benefit from messages around ensuring individuals make the most of their remaining earning years by increasing their tax-advantaged pension contributions and reviewing their retirement funding arrangements.
Struggling with short-term debt is obviously distressing, but is there a financial wellbeing premium to be gained by improving employees’ retirement readiness?
Short-term debt crises definitely have a significant impact on employees’ wellbeing, health and productivity. But workers can also suffer long-term stress at the prospect of not being able to afford to retire. People think they may have to work until they drop, yet not everybody is going to be able to work into their late 60s or beyond. Tackling this anxiety is beneficial to both employer and employee.
Our research with CEBR found that 37 per cent of workers cited insufficient pension provision as a cause of low financial wellbeing. Yet the research also found those employees with access to financial education through the workplace have higher financial wellbeing scores than those who don’t.
How useful is the £500 employer-arranged tax break in addressing financial wellbeing and retirement readiness?
This tax break, which allows employers to give staff £500 a year towards financial advice without creating an income tax liability, is really useful. Yet it is disappointing that lots of employers are not aware of it, meaning take-up has been low.
This is particularly disappointing as while guidance is a good starting point, the financial wellbeing improvements that can be achieved through bespoke, personalised financial advice are significantly greater.
For many people financial advice will prove too expensive, even with the tax break, but there are a lot of people who could afford financial advice who are still not taking advantage of it.
It is worth adding that £500 is not enough to pay for advice for more complex cases, which is why we have asked the government to double this allowance to £1,000.