Employees’ finances are being clobbered from all angles.
The prices of energy, food, and many other essential items are rocketing, interest rate rises are playing havoc with mortgage costs, and investments in equities and bonds are plummeting. Even cash savings are being eroded by an inflation rate of around 10% a year.
But there are many steps employers can take to help their workforces through these turbulent times. These include effectively communicating added-value services and discount schemes already available in employee benefits packages, introducing salary exchange on pensions to save on tax and NI, and providing debt support.
Offering financial education seminars and workshops to shed light on issues like budgeting and saving can also be extremely useful, and Chase de Vere has a range of courses that can help.
One key message we will hammer out in such sessions is the importance of employees avoiding making false economies. Reducing or ceasing their pension contributions is potentially the biggest mistake they could make in this respect.
Our clients are getting a lot of enquiries from employees thinking about taking such action, and a wealth of surveys show that this is becoming a real issue nationwide.
For example, according to recent research from Canada Life, 5% of UK employees have already stopped contributing to their company pension scheme, a further 6% are actively thinking about pausing contributions and another 9% might consider doing so in the future. But such steps are likely to make a significant dent in their retirement plans.
Analysis by Standard Life shows that an employee who started on £25,000 a year at the age of 22 and paid in the standard 8% combined employer/employee monthly auto-enrolment contributions would have a total retirement fund of £456,893 at age 68.
If, however, they stopped contributions at the age of 35 for just a single year, the fund’s value at age 68 would be only £444,129 – a shortfall of nearly £13,000.
Furthermore, if that pause in contributions coincides with a time when share and bond prices are exceptionally low, there could be an even greater cost to not contributing. One of the advantages of making regular pension contributions is that your money buys more fund units when the markets are low than it does when they are high.
Employers should therefore ensure that employees considering pausing pension contributions realise they would be missing out on a range of important fronts. They will not enjoy the tax relief they are entitled to on contributions at their highest marginal rate of tax or the compounding up effect that would have resulted over many years on this and on the contributions themselves.
Perhaps most importantly of all, those in auto-enrolment pension schemes who pause contributions will miss out on employer contributions. The same could happen if they reduce their own contributions to below 5%.
For someone earning £25,000, going without a 3% minimum employer contribution will mean sacrificing £750 a year. Is this really a gift horse anyone can currently afford to look in the mouth?
Employees considering cutting back on life and health policies they hold via flex schemes or via the individual market should also be encouraged to think again. Are there not other savings they can realise first before resorting to such drastic measures?
For example, a worthwhile level of individual life cover could be costing a young employee only a few pounds a month. Surely sacrificing a couple of coffees out a month would be preferable to compromising their family’s security?
Whatever the dilemmas employees are facing with their financial decision making, talking them through with an independent financial adviser (IFA) could make all the difference. And Chase de Vere is well placed to help in this respect as, unlike most of our competitors in the employee benefits space, we also have independent financial advisers who specialise in advising individuals and would be happy to provide advice where required.
No two employees’ requirements are the same, and our advisers can review an individual’s affairs, including pension and protection arrangements, and help them arrive at the best possible decisions.
If you would like to find out more about how Chase de Vere can help your employees during the cost-of-living crisis then please don’t hesitate to contact us.
Content is correct at the time of writing and is intended for general information only and should not be construed as advice.