Helping employees manage their finances efficiently is good news for their wellbeing, helps people think ahead, protects them from the unexpected and builds a clear plan for life events, such as retirement.
There are benefits for employers as well. Money worries can affect productivity and even lead to sickness absence. And, understanding when talented individuals with a wealth of experience are likely to retire helps support workforce planning.
But financial planning isn’t always easy. Most of us find it difficult to picture ourselves in the future. Predicting how much we need to retire, when we are likely to do so and what that retirement will look like can be incredibly difficult. Day-to-day money needs, personal priorities and even emotional relationships with money can all affect individuals’ financial planning.
Employers can help their people make the most of their money by offering workplace-related pensions, investment and protection options. That way, everyone has the opportunity to become well-equipped financially for the future.
Building employees’ financial future
Pensions and retirement planning
Planning for retirement is the work of a lifetime.
Pensions auto-enrolment means that almost all employees can now save for retirement through the workplace. This is great news, but minimum contribution rates won’t guarantee everyone a retirement where they can thrive rather than merely survive.
By thinking about the standard of lifestyle employees want in retirement, and what that means in terms of pension savings patterns, employees can start to gain some much-needed clarity and confidence in their future planning.
Over the course of a working life, people will have many different financial priorities to balance, and day-to-day needs may sometimes take precedence over saving for retirement. But it’s important to continue to keep pensions in mind, even for younger workers.
Helping employees save throughout their career
Contributing regularly to pensions over time is the best way to build up a pot of money for retirement. But it’s not always easy to keep on track when times are tough, or for employees to contribute as much as they might like when they have other financial commitments.
Pensions salary sacrifice is a great way to help employees’ money go further. It could enable someone to continue to save for retirement when they might not otherwise be able to do so, or help employees increase their contributions. That can make a big difference to someone’s standard of living in retirement over the long term.
With a salary sacrifice arrangement, employees make contributions into their pension from their pre-tax salary. That means they’ll pay less tax and National Insurance (as these deductions will be made from the remainder of their salary after they’ve made pension contributions) and there are National Insurance savings for employers as well.
Mercer’s consultants can help businesses assess whether salary sacrifice will benefit their workforce and help with the logistics of setting up and communicating it to employees.
Getting ready for retirement
Once employees get to retirement, their pension is likely to be their main source of income, perhaps bolstered by other assets and savings alongside the State Pension.
Employees can choose how to take income from their pensions as cash, drawdown, annuity or a combination of all three. Often people need help to understand how these different elements can work together over the long term. Employees may have concerns about whether they will run out of money in retirement, especially if they have to pay for social care, or what might be a credible level of income to take each year.
Mercer can help employees create a structured, sustainable, tax-efficient plan that will cut through the complexity, give them certainty about what retirement will look like for them and help them understand what social care might cost them under current rules.
Investing for the future
Other investment options can complement pensions and help employees achieve broader savings goals, such as saving for a house or building a financial safety net.
Like pensions, investment products and portfolio management can help employees access market returns and take advantage of the power of compound returns through regular saving.
Thinking through risk
But there are risks. Regulatory, inflationary and geopolitical actions can all affect markets and it’s important for investors to think carefully about how much risk they are willing to take within their portfolios.
Everyone who invests also needs to be aware of volatility – market fluctuations – and think about their own ability to withstand those rises and falls. Diversification is another important factor. All asset classes behave differently, and having a mix of assets with different return profiles can help to navigate difficult times.
People’s appetite for risk can also change over time. Someone who expects to use their investments to fund imminent retirement might want to take less risk than a younger person who has time to recover from market falls.
Getting the right support
Good communications, financial guidance and financial advice all help employees think carefully about the benefits of investment, as well as the level of risk they are prepared to take.
It can help employees who are already investing to stay focused on their investment goals – and enable those making a start to build a strategy and implement it.
Investing should be seen as part of employees’ long-term financial planning, with the potential to enjoy the rewards when the time is right.
Protection against the unexpected
Most of us spend our lives planning for the future – but what if something unexpected happens to radically change our plans?
Protection should be one of the foundations of financial planning for individuals and for their employers, but many UK adults don't have life cover, and often businesses say that they wouldn't be able to continue if a key person died.
The most common reasons for not having cover are that people simply don’t want to think or talk about the possibility that they might fall ill or be unable to work – or they don’t believe it will happen to them.
But with an estimated one in eight people likely to have to retire early due to ill health, it’s clear that the unexpected isn’t as unusual as we would like to think.
Choosing the right cover
There are lots of different choices for cover, from income protection and critical illness cover, to life insurance. Helping employees choose the right option will depend on their personal circumstances and any other protection products that they already have in place, such as mortgage liability insurance.
Cost is an important consideration. The earlier someone takes out cover, the more cost-effective it will be. Premiums increase with age, as does the likeliness of suffering serious illness.
Protecting employers too
From an employer perspective, offering protection helps employees feel confident that, should the worst happen, they will be able to cope and continue to support themselves and loved ones. Appropriate cover can also help with managing tax-efficient death-in-service benefits, shareholder protection and key man cover.
Mercer Private Wealth has a dedicated team to help employees and employers, understand and implement the right cover, from completion of paperwork to start of their policy and beyond.
Wealth for future generations
Like protection, inheritance tax (IHT) can be a sensitive topic. None of us wants to dwell too much on what will happen when we die.
But it’s important to think carefully about what will happen to someone’s assets after death, to ensure that wealth is transferred tax-efficiently to the people and causes that matter to them.
Everyone in the UK has a personal allowance of £325,000 that they can use to pass assets onto nominated beneficiaries without paying IHT. Homeowners also benefit from a main residence nil-rate band of £175,000.
Spouses can pass these allowances on to each other – so a couple might be able to shield up to £1m from IHT (£650,000 in assets and £350,000 in main residence nil-band rate). Any wealth above these allowances will incur IHT at 40%.
Although £500,000 per person might sound like a lot, more and more people’s total assets now exceed this figure. Property prices have risen steadily over time, and investments have generally done well over the last 20 years, so even people with relatively modest homes and savings can be hit.
Cutting through the complexity
That means it’s important for employees to understand the full value of their assets and identify ways to minimise any potential tax bills. Options could include effective gifting, investment in business property relief or putting money in trust.
However, this is a complex area and many people will need support or advice to navigate IHT planning. Mercer can help employees get a clear picture of their circumstances and objectives, then advise them with technical support and investment knowledge as a workplace benefit.
The result will be greater certainty for employees, and confidence for loved ones that IHT is under control.Disclaimer: Please note that the value of investments, and any income from them can fall as well as rise so individuals could get back less than they invested. Tax rules can change and value of any benefits depends on individual circumstances.
Taking action on financial advice and guidance
Giving employees support with financial planning and advice helps everyone make the most of their savings, have confidence in their long-term path to retirement and know that their wealth is well protected for the future.
Our workplace pensions services can help every employer set up a good-quality well-managed pension scheme for their staff, support their wider financial wellbeing and help them plan for retirement.
For employees who want further investment choices, financial planning and IHT support, Mercer Private Wealth can help: