Thousands of workers are suffering as businesses are shut down and people urged to stay at home because of how rapidly Covid-19 is spreading around the world.
From pay cuts to redundancy and unpaid leave, employees are facing some big challenges, especially when it comes to their finances.
The UK government has made funds available to help those struggling because of the coronavirus outbreak, but how can advisers help clients manage their finances throughout these unprecedented circumstances?
“This is a deeply concerning period for so many people across the country,” says Rachael Griffin, financial planning expert at Quilter.
“Many are worried about their health and the wellbeing of their friends and family, but also the long-term financial impact on their household.”
Save for darker times
There are going to be many obstacles along the way until the infection curve is flattened and things will slowly start to go back to normal, but this could take a while.
“Regrettably, some businesses will face severe challenges,” adds Griffin. “Although we hope that measures to protect jobs will help to minimise the damage, some people may be asked to take a period of unpaid leave, reduce or waive some of their pay and benefits, be placed on furlough, or accept redundancy.
“Of course, the immediate concern in that situation will be meeting any income shortfall, and in difficult times it is important to have cash savings available to help manage financial disruption.”
But a recent survey by Openmoney and YouGov has found that more than a fifth (21%) of the British population does not have immediate access to their savings. Additionally, 18% admitted to having just enough to cover essential expenses for two months or less.
While some may be in line for redundancy payments, this pot of money will only last so long.
Devil’s in the detail
“But there are other key steps people can take to protect their finances if they are confronted with the prospect of a reduction in earnings or job loss,” Quilter’s Griffin adds.
There are ways people can shield themselves in extreme cases, such as being laid off or losing a considerable chunk of income.
If clients have income protection and life insurance, they should check their policy to see what it would actually cover, what conditions are there, and what sum they would be entitled to. Others may have critical illness cover, but this type of insurance would mostly pay out only in case of illness and/or injury.
Most policies won’t cover redundancy either, but if they do, there could be clauses as to what criteria need to be in place for a payment to be made. For instance, voluntarily accepting a redundancy offer could automatically invalidate a claim.
Think long-term
If clients are affected by a period of unpaid leave, they should check with their employer to see if their benefits package still stands, because medical insurance, critical illness or increased pension contributions may not be available if they are not working.
And while people can choose to go on a ‘pension holiday’ – where they temporarily stop paying into their pension – they might lose their employer’s contributions as well.
Halting payments, even for just few months, could have lasting effects on retirement income.
Auto-enrolment implications
Last week, the UK government confirmed that auto-enrolment pensions will be covered by the job retention scheme, meaning that grants available to furloughed workers will also pay into their pensions.
Tom Selby, senior analyst at AJ Bell, says: “It is good news for both workers and employees that the job retention scheme is being extended to cover auto-enrolment pension contributions.
“This sends a clear signal about the importance of retirement saving and will help limit the impact of the Covid-19 crisis on people’s retirement outcomes.
“The financial impact on those furloughed will depend on the extent to which their employer is willing to pay any wages over and above the government grant level.
“For example, someone earning £50,000 who is moved onto the minimum furloughed amount of £2,500 a month – equivalent to £30,000 a year – will see their employer and employee contributions drop significantly for a limited period of time.
“Someone earning below £30,000, meanwhile, should only see a 20% reduction in their pension contributions, while those who have the extra 20% of wages made up by their employer should be unaffected.
“Either way, provided this is only for a few months, it shouldn’t make a material difference to people’s retirement outcomes,” Selby adds.
Make the right calculations
Charlotte Nixon, financial planning proposition director at Quilter, says: “As well as the loss of income, there are other financial considerations to think about if you are made redundant or experience a reduction in earnings from employment.
“Many employers offer life cover and income protection as part of the overall employee reward package, so find out if you will lose those benefits.
“The same goes for other insurance policies you might have, like critical illness cover.
“Redundancy cover was once more common within protection policies, but is now relatively rare. Be absolutely certain to check what you are covered for and don’t assume you have it under a protection policy as-standard.”
Even if people are eligible for a claim, having spent time off work because of a redundancy or unpaid leave could considerably reduce the sum they would get if it is calculated on their earnings.
Ian Martin, financial planner and employee benefits consultant at Quilter, adds: “For those people whose jobs are affected by Covid-19, it is important to ask not only how it will impact income, but whether there is a knock on impact on other employee benefits.
“If you make a claim on a life, critical illness or income protection policy arranged through your company then the payment might be calculated based on average earnings, so a future claim could be lower due to a period of reduced pay.”
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