Payroll saving schemes are a lesser-known benefit, but many large organisations – including BAE Systems, BT, and Coca Cola – offer the option to their employees.

As this benefit becomes more popular, you might be curious about how it works and whether it could be advantageous to your business and employees.

Here’s everything you need to know about payroll saving and why it’s catching on.

Employees can contribute to savings automatically with payroll saving

Payroll saving is a simple scheme that allows employees to make contributions to a savings pot directly from their pay.

It works in much the same way as pension contributions in that the amount is taken and paid into savings before the employee receives the rest of their salary. This means that they never see that money; it goes straight into the pot each month.

The employee can decide how much they want to contribute and change this figure when necessary.

Like pensions, the savings may be invested to generate more long-term growth. However, unlike a pension, employees can typically access their payroll saving pot at any age (though they may be limited to a certain number of withdrawals per year).

Payroll saving makes “paying yourself first” much simpler

Paying yourself first is a core financial management concept. It means contributing to savings and investments (effectively paying your future self) before spending on anything else.

If you do this, whatever happens over the rest of the month, your savings continue to grow.

The alternative is to pay all your expenses and spend throughout the month, then try to save whatever is left. If you’re incredibly disciplined, this might work, but, for many people, it results in them saving less.

This often happens because, when saving is treated as an afterthought, discretionary spending increases, leaving less to set aside for the future.

That’s why payroll saving can be so beneficial for your employees, as it removes the temptation to spend and ensures they save every month.

A regular savings habit allows employees to work towards long-term goals and fund retirement

While there may be limits on the number of withdrawals they can make from their payroll saving pot each year, your employees will have access to capital should they need it. This gives them a level of financial security they wouldn’t otherwise have.

However, the more important benefit is that they can save for medium- to long-term goals, too. For instance, an employee might build savings to:

• Renovate their home
• Pay for a child’s education or help them with a house deposit
• Take a once-in-a-lifetime trip.

The wealth they generate through payroll saving may also benefit from investment growth over time and could supplement their pension savings later in life. Ultimately, this means they have a more comfortable lifestyle and may be less likely to experience stress about their finances in retirement.

Crucially, if they want to retire early – before they can access their pensions – they may be able to use wealth from a payroll saving scheme to cover their living costs for a period.

Payroll saving could be an attractive benefit that increases retention in your business

Pensions are an important benefit that helps employees save for retirement. However, there are limitations on when they can access these funds, so a pension might not be especially useful for supporting other goals or improving overall financial security.

Payroll savings could be a useful supplement to pensions by helping your staff save for various milestones throughout life, while also improving their prospects in retirement.

As such, this is an incredibly useful benefit that could make it easier to attract and retain the best employees. That’s why payroll saving schemes are becoming more popular in companies around the world.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 50. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Rossborough Financial Services Limited is regulated by the Jersey Financial Services Commission under the Financial Services (Jersey) Law 1998 and licensed by the Guernsey Financial Services Commission.