- Financial education
Complete the sequence: 2, 5, 8, ?
At the moment, the answer is ‘you decide’. Over the last two years, minimum auto-enrolment pension contributions have risen from 2% in April 2017 to 5% last year, and finally to 8% in April 2019. There might be no further mandatory increases in the pipeline, but employers and employees can still increase their contribution rates to build a more comfortable retirement.
Although almost all employees are now paying into a pension at auto-enrolment minimums or more, many still feel less than confident about their retirement finances. In fact, 31% of employees say that funding retirement is their biggest financial worry – more so than paying off debt (27%) or coping financially should they lose income (23%). Only 43% believe they will be able to retire at the age that they want.
Those figures are findings from Close Brothers' Employee Financial Wellbeing Index. The Index measures how financially fit employees in the UK feel in each of eight categories: money worries, budgeting and planning, debt, protection, savings and investments, retirement, properties and mortgages, and tax. Based on responses from over 5,000 UK employees, each category is assigned a score out of 100. The Index also includes an overall wellbeing score, which is an average of the scores on all eight of the indices. Employers also have their own score for each category, showing how financially fit they believe their staff are.
The score for retirement is 50.3, one of the lowest across the eight constituent categories and below the overall financial wellbeing score of 53.6.
Women are finding retirement planning particularly challenging. Nearly half (48%) say that they feel unprepared for retirement, compared to just 25% of men. And older workers, both male and female, are particularly at risk – 22% of over-55s say that they don’t feel prepared for retirement, despite having relatively little time left to grow their pension savings.
Around a quarter (24%) expect to continue working into retirement, even if that isn’t in a full-time capacity. Employment rates are growing fastest in the over-50s age group and although people will have a variety of different reasons for wanting to be, or remain, in employment, some will be doing so because they cannot afford to retire. And although some employers are keen to retain the skills and experience of older workers, 48% of businesses say that fewer employees are retiring than they would like. The same number say that low retirement rates are increasing their people costs.
Despite the impact on business of employees’ inability to retire, employers vastly over-estimate employees’ financial wellbeing when it comes to retirement planning. The employer Financial Wellbeing Index score for retirement is 72, a whole 21.5 points higher than the employee score. This is one of the widest gaps in perception between employers and employees across the whole of the Index.
Poor financial wellbeing related to retirement is clearly having a negative effect on both employers and employees. Could auto-enrolment be contributing to that perception gap? Do employers think that because they offer a pension, staff no longer have to worry about retirement? While making sufficient contributions to a pension is the most effective way of building retirement confidence there are other ways that employers can help as well:
Saving for retirement is a long-term process, so putting money into a pension from as early an age as possible is the best way for employees to build up a pension pot, and with it the comfort factor of knowing they are prepared for retirement.
Build employees’ knowledge
The findings from the Financial Wellbeing Index show that people have very little confidence in their ability to retire. Financial education and financial advice can both help to build knowledge and give employees a framework to assess whether they are genuinely on track, and what they can do to feel more in control of their retirement planning. Nearly a quarter of employees (24%) say that they never review their pensions, and 7% have lost track of them completely.
Help employees take ownership of their retirement plans
It’s very unlikely that an employee will work for the same company throughout their career. As such, every employer needs to not only help employees build financially for retirement, but also help them understand the importance of keeping track of their own savings over time.
Look beyond pensions
Although pensions are central to retirement saving, there are other ways to save as well. Lifetime ISAs and other tax-efficient forms of saving can also play a part in long-term financial planning. Make sure that employees understand the tax implications of all the options available to them, especially if they are likely to be affected by the lifetime or annual allowances.
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