The end of the tax year always brings a flurry of activity in any advisers' office as they review their clients' benefits and look to maximise their tax advantages. This year, with stakeholder on the horizon, that activity could be more frenzied than usual.
Most of the focus will, understandably, be on pensions as advisers decide whether they will dip their toes in the stakeholder pool and identify what action is needed for clients with existing pension arrangements. But can advisers afford to overlook the opportunities that the same legislation is opening up for wider employee benefits?
There is no denying the premiums for risk benefits are generally small compared with pension contributions, but advisers should not be too eager to overlook the other advantages wider employee benefits can bring. Building and cementing relationships with clients and protecting the existing pension book means that employee benefits are becoming increasingly important for employers.
Meeting business needs
Apart from helping with staff recruitment and retention, a well-devised employee benefits package can also help deliver cost-effective solutions to business issues, something which employers may not have previously appreciated. By complementing the pension solution, advisers can help increase customer dependency on their skills and advice the 'stickability' factor an ideal situation for future business development.
One of the key resources within any business, large or small, is its staff and the service they provide. The need to attract and retain staff with the right skills who can deliver business results in an increasingly competitive market raises the focus on employee benefits packages. Increases in skills shortages are well reported and employers have become more aware of the risk of losing valued staff to their competitors. As a result, businesses are paying more attention to the benefits packages they offer and are more willing to enhance and reshape those packages to increase staff loyalty and motivation.
Stakeholder will provide an ideal catalyst for employers to review what they offer staff, and for advisers, who are informed about the type of employee benefit solutions on offer, to capitalise on the business opportunities available.
A new tax regime
Leaving aside any pensions issues that need addressing, the new taxation regime taking effect from 6 April will introduce some interesting issues on the provision of life cover and waiver within group personal pensions (GPPs). The changes will affect any new members to existing GPPs who join after 5 April 2001 and any new GPPs set up after then.
For life cover, the key change is in the contribution limit. Those employees already in the GPP by midnight on 5 April 2001 will continue to be subject to the old tax regime, allowing 5% of net relevant earnings (NRE) to be used for life cover within the GPP contract. But for those employees who join from 6 April onwards, the maximum life cover contribution will be 10% of the pension contribution being made to their GPP. At first glance 10% may seem more generous but as the following example shows, this is not true.
Compare Employee A who joined the GPP 5/4/01 with Employee B who joined 6/4/01. Both earn the same salary, £40,000, and both have total contributions of £3,000 payable to their GPP. The maximum life cover contribution for Employee A will be £2,000 while for Employee B it will only be £300. Assuming they are both the same age, this will buy a lot less life cover for employee B than for his colleague.
There is also the possibility of running a group life scheme alongside the GPP or stakeholder. This option can only be considered if the employer is willing to pay, although group life costs tend to be very reasonable. A decent amount of group life cover can generally be bought for around 0.5% of payroll. What is more, group underwriting terms will apply, with an element of free cover available for as few as 10 employees. For 50 or more employees, the amount of cover that can be provided without any medical evidence will be much more substantial due to the wider spread of risk.
The changes affecting waiver are more significant.
l Waiver cover has to be written as a separate contract from the pension benefits.
l Premiums paid to buy waiver cover will not qualify for tax relief.
l Any waiver benefits used to pay pension contributions will be treated as normal contributions and grossed-up for basic rate tax relief.
This last point could have the most significant impact. Because the waiver benefit will attract basic rate tax credit, the grossed-up benefit must meet the Inland Revenue criteria for contribution limits. This will allow payment of £3,600 per year via waiver regardless of earnings, but any higher contributions will only be possible via waiver if justified by NRE. This is in sharp contrast to the taxation position for pre-6/4/2001 members of existing GPPs. Because no tax credits apply to waiver benefit, continuation of pension contributions via waiver are not restricted without the need for NRE. This clearly places those employees whose pension contributions exceed £3,600 a year at a disadvantage if their earnings drop or stop as a result of their long-term disability, with a knock-on effect of reducing their expected pension. Again, it is worth looking at an example to highlight the point.
Contrast the position of two employees who join the GPP one day apart. Employee C joins 5/4/2001 with Employee D one day behind. Both are 36 years old and earn £100,000 allowing a pension contribution of up to 20% of the earnings cap (currently £91,800) ie approximately £18,000. If Employee C became too ill to work and waiver kicked in, contributions of £18,000 could be continued until retirement, regardless of earnings. For Employee D, however, continuation of £18,000 contributions would only be possible if supported by NRE. For Employee D, a drop to £3,600 contribution would therefore leave a significant shortfall in pension provision. To be fair, the drop to £3,600 will not necessarily apply as soon as Employee D's earnings dry up, due to the operation of the new tax easement which replaces carry forward. This will allow individuals to nominate a 'basis year' in which they received NRE which can then be used to justify payment of premiums for the basis year and the following five tax years.
Plugging the gap
But even with this easement, a significant drop in earnings will in due course have a knock-on effect on the amount of waiver that can be paid to the pension.
This creates an ideal opening for advisers to discuss group income protection as an alternative to waiver for groups of employees. Apart from the group underwriting terms already mentioned, many providers now offer integrated rehabilitation and counselling services as part of their group income protection policy, working with the employers to help manage their employees back to health and work.
But employee benefits do not stop at life cover and income protection. Cover against critical illness and life cover for spouses/partners can also be added to make an attractive employee benefits package which advisers can help tailor to meet an employer's business needs.
Small and medium-sized businesses are an increasingly valuable market as they face the same business problems as large businesses particularly in relation to staff recruitment, retention and motivation. With this size of business a menu-based employee benefits package can work well, particularly for those with between 50 and 500 employees. It can help bring large company benefits within the reach of smaller companies and also fits in well within a stakeholder pensions environment.
With a menu-based package the employer can select potential benefits for the workforce that fits with their budget, and the employees are free to select their preferred benefit options from within this menu. These might include mainstream benefit options such as life cover, income protection, critical illness and life cover for spouses and partners. Although this may not allow a totally free choice of benefits, it is likely to mean that benefit flexibility can be achieved in a cost-effective way, particularly where the use of web technology is employed.
Employee involvement in benefit choice should help improve employee appreciation of the benefits being provided by their employer with a knock-on effect on staff motivation. Employers in turn should see a return for the employee benefits provided via improved staff motivation and delivery of business results.
Today, employee benefits extend to anything valued by an employee as a reward associated with their employment. The reality of today's working environment is that employees are looking more and more at the total benefits package they are offered by their employer, and those who can provide an attractive array of options are likely to win the race in terms of staff retention. Employee benefits is undoubtedly a business area with considerable growth potential and advisers should not underestimate the longer-term benefits this market can help deliver in terms of their business growth.
