By Ben Pollard, CEO and founder, of workplace pension and savings fintech Cushon
The current cost of living crisis is hitting households across the UK hard. Burgeoning energy costs, increased National Insurance (NI) and rocketing fuel prices mean pay packets are having to stretch further than ever.
New research from Cushon found over half (52%) of people are concerned about the rising cost of living, while under a quarter (24%) feel positive about their financial future in the next six months. Furthermore, a quarter (25%) can’t see how they will be able to pay their bills in the next six months.
While many employers will have taken the rising cost of living into consideration as part of annual pay reviews in April, there is still more that employers can do to help their staff become more financially resilient in these challenging times.
Greater financial resilience amongst employees can only lead to greater employee wellbeing, crucial to boosting productivity and retaining talent. For example, employers could explore running webinars or 1-2-1 drop-in sessions for their staff focused on financial wellbeing. They could also consider their wider benefits package and explore options such as workplace savings schemes – potentially offering employer contributions also.
In the current economic climate, many households are understandably more concerned with making ends meet today rather than saving for the future. Over half of people (54%) say the struggle to meet everyday living costs is preventing them from saving the amount they want to. Almost one in four (38%) think the NI hike is going to make the situation worse once it hits pay packets. To avoid a future pensions crisis in retirement, UK savers need to ensure that every penny counts. And employers can support employees whilst financially benefiting too.
A simple but underutilised solution is salary sacrifice. Although many larger employers already offer this option, there are still many small to medium sized companies who are not taking advantage of this cost saving solution. And millions of employees remain unaware of the benefits of it and are therefore missing out on huge sums of free money. In fact, our recent research shows that UK pension savers are collectively losing out on £1.9bn by not taking advantage of salary sacrifice.
If an employee chooses this option, they agree to reduce their salary by an amount equal to their pension contributions and their employer will then pay their total pension contributions, which saves both parties money in lower NI contributions. The term ‘salary sacrifice’ is itself misleading as take-home pay is actually higher due to reduced NI payments, although the employee’s salary may look lower on paper, the pension contributions remain the same. Maybe ‘salary exchange’ would be a more suitable and less negative term? It would certainly help encourage more employees to embrace this option.
Despite the financial benefits, take-up remains low. 63% of people are not aware of salary sacrifice, and of those that are, only 34% of people with a workplace Defined Contribution pension use it. Again, this is partly down to how the industry describes it. One in four (24%) think salary sacrifice ‘doesn’t sound positive’ and one in five (18%) wouldn’t use salary sacrifice as it would make their income ‘go down on paper’.
Changing how it is positioned could help improve this perception, with a third (34%) saying they prefer the term ‘exchange’ to ‘sacrifice’. It’s vital that both the industry and employers continue to remove the ever-present jargon that crops up when talking about finances, especially within pensions. It’s one of the only ways we’ll be able to support people to better understand their finances and take control of their money amid the ongoing crisis.
Importantly, salary sacrifice also benefits employers too as the reduction in their employees’ pay also reduces the employer’s NI contribution. Yet around four in ten (38%) workers with a Defined Contribution pension, who could benefit from this, believe their employer doesn’t even offer it at the moment or are unsure if they do. Previous research found that only 41% of SMEs and only 61% of large organisations offer this benefit to their staff. We’ve calculated UK businesses may be losing out to the tune of £2.1bn. Clearly, at a time when everyone, both employers and employees, are trying to stretch their finances further, this is a huge missed opportunity.
It’s worrying that there are currently so many employers who are not offering this option. Employers are now facing a 9% increase in National Insurance costs. If more employers were to use salary sacrifice it would ultimately benefit their bottom line, and could go a long way in helping to alleviate some of workers’ fears and foster better employee-employer relationships.
Ultimately, we believe all employers should now be offering this to their employees. And for those that already do, more should be done within organisations to increase awareness, develop understanding and fully explain the benefits so that employees take full advantage of this simple trick and maximise their income.