“When you deposit tuppence in a bank account, soon you'll see that it blooms into credit of a generous amount.”
George Banks - Mary Poppins
If the wisdom of George Banks stood true, we would all be rushing to the nearest bank to invest a tuppence with the promise of it multiplying into a bountiful pot of savings.
Sadly, the reality is 17 million people of working age in the UK have less than £100 in savings (Money Advice Service, 2016). Either we are not making it to the bank with our tuppence or the banks are not earning us as much as we thought.
Nowadays employers are under increasing expectation to support employees’ financial wellbeing above and beyond ‘a fair day’s wage for a fair day’s work’. So…
Why might so many UK employees have less than £100 in savings?
- Low interest rates – With the Bank of England interest rate still at 0.25% (a record low), money in cash savings accounts will be seeing minimal growth and this is demotivating savers. They might feel their money’s worth more in their pockets than in the bank.
- Lack of confidence – in the ability to reach sufficient savings goals. Many potential first-time home buyers feel that achieving the necessary deposit and salary level required to purchase a property is so far out of reach, it is pointless trying.
- Lack of awareness - Employees might not understand or even care to explore the savings options available, finding investment savings products complicated or untrustworthy due to a lack of education and exposure, and a wave of negative press following the 2008 global financial crisis.
- Living for today - Employees with low disposable income may prioritise short-term spending without thinking or planning beyond this. Others may choose to spend their money on ‘living’ – investing in products or experiences that can enhance life now rather than saving for a rainy day.
Current non-savers require guidance to become engaged with saving. Current savers (and the newly converted savers) need education and support in picking savings vehicles that will help to make their savings work for them as efficiently as possible. An effective way to reach more early savers is through the workforce via a voice of authority…the employer.
Goals that might motivate employees to save more
- Covering unexpected bills without resorting to debt
- Covering unexpected drops in household income without resorting to debt
- House purchase
- Car purchase
- Comfortable retirement
- Children’s university fees
Engaging and empowering your employees in financial wellness can enhance their happiness, personal security and promote an overall more positive sense of wellbeing and enthusiasm in the workplace. Naturally this can provide benefits to both the employer and employees.
Some employees may need assistance in setting savings goals and budgeting in order to assign a regular amount of their income to savings. Professional financial advice can help communicate options and ideas to your workforce thoroughly and in a way that involves and engages employees. Complex options can be made clear and furthermore by engaging a third party, internal resources can remain free while financial wellbeing initiatives are proactively communicated. As the financial landscape continues to evolve, a financial wellness initiative can accommodate the emergence of new products or services and changes in regulations and government legislation.
Once employees are motivated to save, next, their hard-earned money needs to work hard for them. The key question at this point is…‘to invest, or not to invest?’ Let’s start with a look at the latter:
Easy-access savings account
Put savings into one of the ‘big eight’ banks’ easy access savings accounts and you are likely to earn interest at an average rate of just 0.04% according to research by Money Mail (thisismoney.co.uk, May 2017). With inflation at 2.7% (as at April 2017) other options need to be explored and fast, before your money is de-valued in real terms. People often use these accounts because they are an easy option all round. They are available through your current bank and you don’t have to do any research or make any major decisions except for how much to put in and when. But how useful are they?
Cash ISA – Help to Buy, Junior
80% of all ISAs are Cash (HMRC, 2017). If you held a Cash ISA since the 2009/10 tax year you would have received an average interest rate of 1.01% (moneyfacts.co.uk, 2017). With the average rate of inflation over the same period at 2.2%, Cash ISAs would not have provided returns that you would write home about.
The maximum that can be invested in an ISA, in 2017/18 tax year, is £20,000 and all savings and growth held in any ISA are tax-free.
Interest rates on these accounts are not much better than easy-access and are variable so would need monitoring. In addition to this, providers would need advanced notice, of anything from 30 up to 90 days, before savings can be accessed.
Regular savings account
Interest rates between 2.5% to 5% can be achieved in the market today but money must be deposited every month, often with a minimum amount stipulated. This is good as it may help keep a savings plan on track but with limitations on how much can be deposited each month, withdrawn, and held in the account in total, you may struggle if you need to access funds in an emergency, want to increase your monthly payments or build a substantial savings pot.
Fixed Rate Bond
Savings cannot be accessed during the term of the bond and the longer the term the better interest rate received. Terms can be between one and five years with current rates peaking at 2.25% for a five year bond.
Stocks & Shares ISA – Lifetime ISA (LISA), Junior
Only 20% of ISA subscribers hold a Stocks & Shares ISA, where savings are invested in the stock market. People can be put off as they think it is complicated, they don’t know what to invest in and the value of their savings may decrease as well as increase.
The average Stocks & Shares ISA fund grew by 15.8% in 2016/17 (moneyfacts.co.uk, 2017). If your fund dropped by 10% in 2017/18 you would still have seen an average return over two years of 5.8% which is higher than any non-investment option. For 2017/18 investors are subject to the £20,000 annual subscription limit, but there are no restrictions on withdrawals or how much can be held in the account.
Thanks to Automatic Enrolment (AE) employees are much more likely to be a member of a workplace pension scheme. Contributions paid into the pension will be invested into the default scheme fund, unless the member chooses to select a different fund. With exposure to the stock market and investment over a long time horizon, members should be able to retire more comfortably than if they’d put their cash under the mattress.
Add to this the compulsory employer contributions and tax-relief received on employee contributions, to not be a part of the workplace pension is turning down free money!
Invest vs not invest
With the potential for much higher returns, investing would seem to be the best route for employees to reach their savings goals. This can only be achieved by ensuring that employee concerns around investing are addressed, helping them to understand that:
- Investments don’t have to be complicated. ISAs can come with ready-made portfolios that are well diversified and sit within the level of acceptable risk.
- You don’t have to be an expert in investing to be invested. AE pension schemes have a default fund that best suits the overall workforce of that company and a financial adviser can help employees ascertain the level of risk they are comfortable taking to select a ready-made ISA portfolio.
- Investments can go up as well as down but if saving for the medium- to long-term (five years or more) any dips in the market should have time to recover and potentially grow beyond a non-investment level.
Employees who are completely risk averse may be better off being in a non-investment savings product rather than having sleepless nights, despite the impact on their savings. Each employee is different and a one size fits all approach will never work.
With discussion and education via an ongoing employee financial wellbeing initiative, employees are given the opportunity to benefit from a whole market of options available to them and get on their way to setting and achieving realistic savings goals.
Tax treatment depends on individual circumstances and may be subject to change in the future
Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.
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