Whether you have a scheme now or are waiting to use the Government's NEST proposition, the coming changes will undoubtedly lead to employees asking more questions of your HR department such as:-
- Why do I have to contribute?
- How much should I contribute?
- Which funds should I choose?
- How much can I expect at retirement?
- What options are there when I do retire?
- What do I do about any existing arrangements?
The big question for your department is how are you going to answer these questions?
First, here's what you can't do:
- You can't tell an employee whether or not it is a good idea for them to join the scheme
- You can't tell an employee whether they should utilise ‘salary exchange / sacrifice'
- You can't recommend how much to contribute
- You can't suggest a fund choice
In fact pretty much anything that can be taken as advice in your organisation isn't legally permissible. Providing wrong, inaccurate or even incomplete advice could mean your employees lose out and therefore your organisation maybe liable for these losses. It is a surprise that even without employers encroaching into advice on pensions, employees have not pursued any recent loses to the value of their pension funds under an employer's duty of care.
For example, if your default pension fund choice is ‘balanced managed' and an employee argues they received no advice and they were really a cautious investor, where does the potential liability for the loss lie?
If you can't offer advice what can you do then to promote the value of what you're offering?
Well you can give employees facts and information:-
- How much you as a company are putting into their scheme / or matching
- Literature from the pension scheme provider
- You can point out the generous tax relief available
- Details on eligibility and how to join the scheme
- You can also organise your own presentations as long as it's generic information.
You can also point them in the direction of receiving advice by:-
- Recommending they speak to an independent financial adviser
- Refer them to ‘Moneymadeclear.fsa.gov.uk', the FSA's website
- Refer them to the Pensions Advisory Service www.pensionsadvisoryservice.org.uk
To negate your responsibility entirely, though, the only possible solution is to offer one-to- one pension advice with an FSA-registered person to every employee. The onus for the advice then rests upon the FSA-registered individual and their Professional Indemnity Insurance. Only this way can you ensure that:-
- Your employee receives advice on the level of contribution they need to make to fulfil their desired income at retirement
- Your employee receives advice on the funds that are suitable, based upon your employee's ‘attitude to risk'
- Your employee receives advice as to the negatives as well as the positives of salary exchange / sacrifice and how it could affect their Working Tax Credit, reduce their S2P pension contributions and, if near the threshold of the Lower Earnings Limit, their right to a basic state pension
In fact, any advice regarding how the pension scheme will directly affect the employee based upon their individual circumstances and requirements can be provided by the FSA-registered individual to ensure your employee is making the most of the benefit that your organisation is offering.
One-to one pension advice is truly a valuable employee benefit but because it is a benefit for a specific individual the HMRC class it as such. There is, however, an exception in the form of:-
EIM21802 - from 14 December 2004, S.I.2004/3087 exempts from a benefits charge the cost of pensions advice and information provided specifically to an employee (for example, in a one-to-one session), as long as
- similar advice is offered to all employees, and
- the nature of the advice does not extend beyond pensions into general financial, and particularly tax, advice and
- the cost is no more than £150 per employee per year.
If the cost of the advice exceeds £150 per person the whole amount is taxable, not just the excess over £150.
If you can therefore find an independent financial adviser who can provide this service for £150 per employee per year, then this is a very useful way to provide the one-to-one advice needed to reduce your potential liability while offering a tax-efficient employee benefit.
But it still costs £150 per employee per year if you can find an independent financial adviser willing to do it for that money. If you look to implement salary exchange / sacrifice at the same time to your organisation, then potentially as an employer you could currently save £153.60 in National Insurance per £1,200 per year. Bear in mind the advice that needs to be given about how salary exchange may affect your employee's benefits, redundancy payment, etc.
But in theory you could get the HMRC to pay for your independent financial adviser. It's worth a thought.
Neil Cutmore is an independent financial adviser at Simpler Advice
