A job change on the part of your client is an ideal opportunity to recommend a full financial review...
A job change on the part of your client is an ideal opportunity to recommend a full financial review to assess the impact of any major adjustments to the employee benefits package. Unless your client is moving to a blue chip company, the benefits may be less comprehensive and valuable than expected.
Over the past decade the trend towards defined contribution (DC) pension schemes has been accompanied by a general reduction in core and fringe benefits such as income replacement and medical insurance.
Even where the employer maintains a defined benefit (DB) scheme, certain insurances that traditionally were regarded as key to the employee's guaranteed benefits package may now only be available through a flex scheme or even as a voluntary benefit, where the employer negotiates group rates but does not actually pay the premium (see 'Voluntary benefits' below).
It is important to be armed with the relevant information before the client joins the new employer. Joelle Daumieres of William M Mercer says: "Key items like pensions, share options and company cars are automatically discussed at an early stage in the interview procedure. However, protection benefits may not be discussed until you are close to accepting a job offer or have already done so."
The smart adviser, therefore, will be on to the case before the client gets to final interview stage. The pension scheme trustees and personnel department should be willing to provide a full list of benefits and set out clearly which items are:
l Guaranteed, and paid for by the employer;
l Discretionary, and paid for by the employer;
l Guaranteed, provided the employee elects for the benefit through the flex scheme;
l Available only through the voluntary benefits scheme.
Ideally the client should be briefed before accepting the new position so they can negotiate additional cover where possible. Where this is not possible the adviser will need to identify the gaps in provision and assess the quality of any financial services products available through the employer on a flex or voluntary basis. In practice, a large employer may offer benefits through all of the above schemes. If the client accepts a position he or she will need advice on which combination of flex and voluntary benefits is the most appropriate for his or her circumstances and budget.
What does your client's benefits package cover?
The protection benefits package will depend on three key factors:
l The Inland Revenue maxima;
l The company pension scheme rules;
l The client's eligibility to discretionary benefits;
The Inland Revenue sets maximum limits for each benefit. This is to prevent companies from channelling too great a proportion of total remuneration through the tax-exempt pension scheme, for example.
It is important to remember that employers do not have to provide any of these benefits, so what your client get will depend on the generosity of the scheme rules. The scheme booklet should set out the benefits clearly.
As Table 1 shows, company schemes can pay a death in service tax free lump sum of up to four times an employee's annual salary but many employers' schemes pay less than this. Table 2 shows that the multiple is likely to increase as your client rises up the ranks.
The third point, eligibility, is particularly important and here you need to check your client's rights to both the guaranteed and the discretionary benefits.
The tax-free lump sum, for example, is paid at the discretion of the trustees. Stewart Ritchie, pensions development director at Scottish Equitable, says: "This is done to avoid inheritance tax but it is therefore very important the member gives the trustees an 'expression of wish' form and replaces it if circumstances change, so that if the worst comes to the worst the proceeds are likely to go to the right beneficiaries.
"These beneficiaries do not have to be relatives or dependants." The expression of wish nomination forms remain sealed until the employee's death so he or she will not have to reveal private lifestyle details.
Payment of the dependant's pension to anyone other than the lawful spouse is far from guaranteed, although an increasing number of schemes have introduced discretionary rules to allow the trustees to award partners' pensions to common law spouses. In some cases this may apply to same sex as well as heterosexual relationships. To qualify for a partner's pension your client may have to prove the relationship was long term and that a significant degree of financial dependency or interdependency existed.
If any of these points are not made clear in the scheme booklet, contact the trustees and also check the history of discretionary partners' pensions.
Find out if there are any written guidelines for the assessment of financial dependency or interdependency. For example, the trustees may look at how long the couple were living together and whether they shared the mortgage.
A low level of life assurance is simple enough to remedy. Life assurance and family income benefit are straightforward, rate-driven products and easily purchased on the open market. Do check if additional term assurance is available through the employer's flex scheme, in which case this may be a good benefit to select with the annual budget.
Life assurance through the voluntary scheme is also well worth considering as the group rates negotiated could be very attractive.
More complex is the issue of a pension for your client's partner. Ideally your client's partner should have his or her own pension plan based on earnings but in the case of low earners it may be wise to consider supplementing this from next April with a stakeholder pension funded by the client.
Additional savings or life assurance would also be a prudent move. Where the partner is not working and particularly where he or she is looking after young children then a mo
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