PENSIONS
How can payroll support financial wellbeing when it comes to pension planning?
Helen Hord, Pensions Audit Director, RSM UK, explains how organisations can help employees to better prepare for their retirement
G ood employers often consider how they can do more to support their employees’ wellbeing. But what do we mean by financial wellbeing, and what’s the employer’s role in supporting it? Financial wellbeing is described by the Money and Pensions Service as “making the most of your money, being secure and in control”. People who consciously look after their own financial wellbeing are often less stressed about money, which has a positive effect on their overall mental and physical health and can enhance their productivity at work. Payroll professionals are in a particularly good position to support employees with their financial wellbeing and particularly, with planning early for a comfortable retirement. However, payrollers aren’t financial advisers, so they mustn’t cross the line between communicating useful information and giving financial advice. Of course, financial wellbeing doesn’t just come from earning a good salary. There are many other elements to the financial package which can support employees’ overall financial wellbeing, including (but not limited to): l workplace saving schemes l season ticket loans l share schemes. Workplace pension schemes come under the financial wellbeing umbrella. But how big a priority is a pension in terms for someone in Gen Z at the start of their employment journey, or even those further on, balancing the many financial pressures of family life in today’s challenging economic climate? The Pensions Policy Institute has recently published a report,
commissioned by the Institute and Faculty of Actuaries, focussing on retirement planning and the attitudes of Gen Z (see the report here: https://ow.ly/ifyG50VfOv8). This report highlights challenges, with 46% saying they don’t think the state pension will exist by the time they retire, and nearly half (47%) saying they will move to part-time work instead of retiring. Employers have a difficult balance in determining a package of financial benefits which is fit for purpose both now and in the future. Could employers do more to educate and encourage employees to save for the future? Conflicting priorities For many people, pension saving isn’t high on the list of priorities. It’s a problem for ‘future me’ and not today’s worry. In the current cost-of-living crisis, many people prioritise other savings, or even just day-to- day living, above saving into their pension. They may also see the current Baby Boomer generation enjoying a comfortable retirement on final salary pensions, while not necessarily realising their own pensions are unlikely to be as generous. People in their 20s and 30s may be prioritising a house purchase, and therefore, if they can afford it, saving into a help-to- buy individual savings account (ISA) or a lifetime ISA (LISA) instead of their pension, which they won’t be able to access until at least age 55. An individual looking to buy a house could save £4,000 a year into a LISA with a maximum tax benefit of £1,000 a year (representing the 25% tax break). The benefit of saving into a pension could be
much higher than that but the impacts of the tax savings and employer contributions (which enhance what an individual pays into their pension) are often not widely communicated by employers to their staff. But what about automatic enrolment? Automatic enrolment (AE) led to many more individuals paying into a scheme, with around 80% of workers now contributing to a workplace pension, compared to just 47% in 2012. But is AE truly successful if they aren’t contributing enough? Are we giving a false sense of security to a generation that may still not have enough to retire on unless they make additional contributions? Let’s look at how much someone on an average salary could expect to save into their pension under AE. Someone earning £35,000 at the age of 24, contributing 4% of their salary a year, along with employer contributions of 4% and tax relief, could save £2,800 a year. Because of the tax relief it would only have cost them £1,150 per year, or roughly £95 per month. If that 24-year-old saved £95 a month into a savings account from the ages of 24 to 30, they would have approximately £7,700 with compound interest at the end of six years. If they put that same amount into their pension, they could have up to £19,600, a substantially larger sum. However, this isn’t money they can access yet, so it won’t help them get onto the property ladder. More needs to be done to engage with members to explain the benefits of saving into a pension scheme from an early age.
| Professional in Payroll, Pensions and Reward | May 2025 | Issue 110 48
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