Frequently used terms
April 6, 2006, is known as ‘A-Day’ in the pension industry; it’s the date that legislation brought in a raft of new pension rules. Two of the most important changes were that members of company pension schemes could save into a personal pension scheme at the same time, whilst another allowed people to draw their State Pension and continue to work. However, it also allowed the creation of relevant life assurance policies.
Phased in from 1 October 2012, ‘auto enrolment’ requires every employer to formally assess their staff and automatically enrol any ‘eligible jobholders’ into a ‘qualifying workplace pension scheme’ (QWPS). It fundamentally changed the employment benefit landscape, taking membership of a pension scheme from being an ‘optional benefit for some’ to a ‘compulsory benefit for many’.
A concept whereby an employer pays only cash for their employees’ services (apart from any legally required entitlements such as paid leave and pension scheme membership if appropriate) but pays a premium that allows individual employees to find and buy the benefits they feel are appropriate to meeting their own needs.
Contract-based pension scheme
See ‘Group pension scheme’ (below).
An assurance product that pays a tax-free lump sum to an employee in the event they’re diagnosed with a specific illness. It’s usual for critical illness policies to be very specific about which illnesses qualify and also their severity – the ‘spirit’ of critical illness cover is to compensate the person for any financial consequences caused by the illness, not just for having the illness.
Another term for life assurance (see below). Most policies pay a one-off multiple of the employee’s annual wages or salary but an alternative is a death-in-service pension. Although the one-off payment is a tax-free lump sum, the pension is considered as taxable income.
Defined benefit pension scheme
‘DB’ schemes ‘define’ the ‘benefit’ received on retirement as a guaranteed, pre-agreed amount. It’s paid directly to the person retiring so they don’t need to buy an alternative product, eg: an annuity or drawdown contract. DB schemes were once popular with public sector organisations and large companies. The employer carries the investment risk.
Defined contribution pension scheme
‘DC’ schemes have become the most popular form of workplace pension scheme. Members make regular ‘defined contributions’ to a pension scheme which, along with contributions from their employer and tax relief is invested in the stock market. Unlike DB schemes, the benefit payable cannot be guaranteed. The member carries the investment risk.
The non-cash items offered by an employer to their employees as part of the employee’s total remuneration package; the employee benefits’ package covers everything except the employee’s wages or salary, commission and bonus.
To offer financial advice an individual must represent or be an appointed representative of a firm registered with the Financial Conduct Authority (‘FCA’). The FCA requires firms to ensure that individuals acting for them have ‘appropriate qualifications’ as determined by the Financial Services Skills Council. There are two types of financial adviser: independent and restricted.
Flexible benefits’ scheme
A flexible benefits’ scheme uses the principle of salary sacrifice to give employees a choice about the mix of cash and benefits they receive. Individual employees are free to choose the benefits they want, if any, from a menu provided by their employer. The cost of those chosen is then deducted from their salary.
A life assurance, or similar assurance product, eg: critical illness and income protection, where a single policy covers a group of people. Typically, the policyholder is a business; the policy covers its employees and is provided as part of a business-wide employee benefits’ package. The value of the cover is usually a multiple of an individual employee’s annual wages or salary.
Group pension scheme
Sometimes known as ‘contract-based pension schemes’, these are the most popular type of workplace pension scheme. They are provided by a pension scheme provider but offered by the employer under their own name. Outsourcing enables the employer to offer a pension scheme to its employees without any of the investment risk, running costs or long-term contract issues.
Health cash plan (HCP)
A health cash plan allows its members to claim back money for day-to-day healthcare services that are either not covered by private medical insurance, such as eye tests and laser eye treatment, or for services that may not be included, such as dental care. It can be offered as a standalone benefit or used to supplement a private medical insurance scheme.
An insurance product that pays part of an employee’s wages or salary if they are unable to work due to a ‘serious’ illness or injury – it is not intended to compensate an employee for ‘having a few days off’ because they feel unwell. Payment is invariably dependent on the employee having regular medical reviews to confirm both their condition and their continual inability to work.
Independent financial adviser (IFA)
The term has a specific meaning: a financial adviser who offers independent advice about financial matters and recommends suitable products from the whole of the market. IFAs are regulated by the Financial Conduct Authority (‘FCA’) and must meet strict competence and qualification requirements.
An assurance product that makes financial provision for an employee’s dependants should the employee die while in your employment. Often called a ‘death-in-service’ benefit, death does not need to happen while the person is at work or as a result of their performing it: they only have to be employed by you at the time of their death. The policy generally pays a one-off sum of money to a beneficiary, or beneficiaries, named by the employee.
See ‘Multi-employer pension scheme’ (below).
Multi-employer pension scheme
Sometimes referred to as a ‘master trust’, this is a workplace pension scheme offered directly to an organisation’s employees by a pension provider. Master trusts/multi-employer pension schemes are generally designed so that employers can satisfy auto enrolment requirements without the need to create their own ‘group’ scheme. Unlike a group pension, membership of a master-trust/multi-employer pension scheme is open to any employee from any employer.
The combined total of your and, if applicable, your employer’s contributions to your pension scheme along with any tax credits and investment growth. Recent legislation has removed restrictions dictating how you can use your pension pot – you’re now free to use it either to buy an annuity that pays a regular income, keep it invested and take a regular income or take the money (and buy a Lamborghini).
Private medical insurance (PMI)
An insurance product that pays for the cost of private medical care is perceived as a high-value employee benefit. Cover is for unforeseen acute conditions rather than pre-existing or chronic illnesses and there will be a list of excluded conditions and circumstance. The benefit to the employer is that they can suffer less disruption from the effects of their employee’s illness if it can be treated privately rather than via the NHS.
Relevant life cover
Relevant life cover is a relatively little-known life assurance policy aimed at company directors or high-earning employees. It’s highly tax-efficient: the benefit is tax free, there’s no P11D Benefit in Kind, the premium is an allowable business expense and the benefit is not tested against the policyholder’s pension lifetime allowance all of which makes it the life assurance ‘policy of choice’ for high-earners.
Salary sacrifice allows employees to offset part of their cash earnings for a non-cash item of equal value. It can sometimes be an attractive benefit for employees as tax and National Insurance contributions may not apply to the non-cash item.
Voluntary benefits’ scheme
A voluntary benefits’ scheme allows employees to buy third-party goods and services at a discounted rate from their post-tax income. The employer researches the market and then uses their purchasing power to make the benefit available; the employee decides whether or not they want to buy it.
How can One Financial Solutions help you?
As a firm of independent financial advisers we can provide you with impartial advice to help you design and create an employee benefits’ package with a competitive edge; one that can make a real difference both to who you recruit and who you retain.
We’ll help you plan an appropriate strategy, recommend the best products from across the whole of the financial services’ market and help build and develop the package you need. If you already have an employee benefits’ package, we’ll review it and recommend changes we think could turn it into something hard to refuse. We can provide an annual review to ensure your employee benefits’ package remains fresh and competitive, grows in value as your employees’ careers develop and stays within your budget.
So, if you’re looking for help with any aspect of your employee benefits’ package, please call us on 020 3714 9565 or ask us to call you by sending an email to firstname.lastname@example.org.