Why IFAs and Employee Benefit Consultants are well placed to give impartial advice | Your pension responsibilities. Choosing the right package | Insurance. Picking the right policy should things come unstuck | Commercial mortgages | What advice do I need?
Introduction
As all employers know, the peace of mind and security provided by having appropriate insurance to cover any eventuality can help ensure a thriving business.
As every Human Resource professional knows, an esteemed and protected employee is likely to be more motivated and loyal and therefore a more valuable member of the team. They appreciate the way they are treated by their employer and welcome the benefits provided for them.
For selecting pensions through to insurance, seeking expert professional advice on your small business' finances will help to take the pain out of the process - and save valuable time. But how can you ensure you receive impartial advice that is most suitable to your business, based on all the financial products on the market?
Why IFAs and Employee Benefit Consultants are well placed to give impartial advice.
There are three types of financial adviser:
INDEPENDENT FINANCIAL ADVISERS (IFAs) and Employee Benefit Consultants offer unbiased financial advice to their clients and recommend the most suitable products, if any, after researching the whole market. The key differentiator is that they act on your behalf and will offer you the option of paying by a fee, as well as the option of paying by commission.
TIED AGENTS can only advise on the products of one provider.
MULTI-TIED AGENTS are financial advisers allowed to recommend the products of a limited selection of providers, rather than just one.
Under its recent Retail Review (RDR) the FSA outlined proposals to change the way the financial advice market is structured. The RDR is currently in its consultation period and we will update this guide if there are any changes to the current situation.
All general and small business financial advisers are required to provide a clear and up front explanation of their status. Answer the series of questions in the decision tree at the back of this guide to help you decide which type of advice you would prefer for your business.
Employers will, of course, have to pay for the advice that they receive. The choice is to allow your financial adviser to take commission from the products they arrange or for a fee to be paid to cover the time taken, similar to how you pay your accountant or lawyer. The solution may be a combination of a reduced fee offset by a commission payment from the product providers.
Financial advisers will inform you in writing at your first meeting how they can be paid and the likely amounts. It is becoming increasingly popular for IFAs and Employee Benefit Consultants not to take commission but to charge simply by a fee. The implications of each route - fees, commission or a combination - will be explained to you before you decide.
Remember that an IFA can access the widest range of financial products and can provide holistic advice on all areas of financial planning for a business.
It may be that you want an expert to look at your existing financial arrangements and employee benefit package. An IFA can assess schemes such as pensions, risk benefits and private medical insurance and highlight any areas you may want to alter with recommendations on possible modifications. Normally a comprehensive report will be prepared by the IFA whilst he or she will provide a professional opinion on your current position.
The ever-changing government legislation means that companies cannot afford to lose touch with their responsibilities. As well as bringing companies up to date with regulatory changes, an IFA or Employee Benefit Consultant will help to ensure that businesses and their employees get the best deal out of any financial decisions they make.
Your pension responsibilities. Choosing the right package.
Stakeholder pension legislation means that businesses with five or more employees must, by law, provide their employees access to a pension plan which falls within the regulations.
Stakeholder schemes are designed as low-cost flexible plans – the charges must be no higher than 1.5 per cent each year.
Members must be able to transfer funds in and out of a scheme whenever they choose without penalty. An array of pension providers offer stakeholder products and employers can pick from a wide selection.
There is more to complying with the stakeholder regulations than simply picking a pension scheme and employers should make sure that they take all the necessary steps. Under the stakeholder guidelines, employers must consult staff before choosing a pension scheme. Once a scheme is designated, employers must inform their employees of the available pension options and provide information about the scheme.
In addition, employers are responsible for ensuring that their chosen pension scheme meets the stakeholder rules and that the scheme provider has registered the designation of the scheme with the Pensions Regulator. Enlisting the help of an IFA can save time as he or she can check these details on your behalf.
Stakeholder pension schemes are not the only option available to businesses. Instead, a more sophisticated personal pension scheme can be offered to employees and/or directors. To avoid making an important pension decision by yourself (which could prove not to be the most appropriate) a discussion with an IFA can help you choose from the hundreds of options available from all the pension providers.
Under a group personal pension plan, for example, employers will be exempt from the requirements of stakeholder pensions if they offer to contribute at least 3% of the employees’ salary. One of the best incentives for employees to join a pension scheme is employer contributions. There are other plus points for group personal pensions as they offer more options than stakeholder pensions, such as a larger choice of investment funds.
The pensions landscape is further complicated by the nitty gritty of the pension schemes on offer and the changing pension rules. For example, employers may currently be providing a final salary scheme, which provides a pension at retirement, based on a proportion of an employee’s earnings at retirement linked to their length of service. A decision may need to be taken as to whether the final salary scheme continues being available to employees who wish to join or a new money purchase scheme is offered to employees which is based on contributions paid and the performance of the fund(s) in which the contributions are invested. Pensions simplification makes the provision of independent advice more important then ever before as the eight different pension regimes have been replaced by one set of rules.
Every business has specific individual circumstances and an Independent Financial Adviser will provide advice to suit your company’s circumstances.
Insurance. Picking the right policy should things come unstuck.
Businesses need to ensure that they have a comprehensive insurance policy in place which will put them back on a sound financial footing should the worst happen. If the business owns its premises, a comprehensive building insurance policy will be needed. The contents of the work place cannot be ignored in case cash or cheques are stolen or equipment damaged. Picking through the policies on the market can be time intensive, particularly as the small print must be read to determine exactly what is covered, and, more importantly, what is not. A decision needs to be taken about the level of cover needed. The hard work can be avoided by getting an IFA to pick the bones out of insurance policies on your behalf.
Alongside insuring buildings and contents, employers must take into account their legal liability towards employees, the public and customers. Employers’ responsibilities are outlined in the Health and Safety At Work Act. Insurance will protect businesses in the event that they are sued for damages, covering costs such as court awards or claimants expenses.
Apart from a company’s physical assets such as a factory, computers, offices, machinery and cars which are generally insured, it also has its employees which for most businesses drive the success, or failure, of the business. Therefore it could also pay to assess whether or not other forms of insurance should be taken out. For example, many companies rely heavily on a handful of key staff members. If one of these individuals should die, the company may lose profitable key accounts, be unable to continue with a large project or in the worst scenario, the business may be forced to close. Key man insurance (life assurance taken out by the company on the life of a key employee) can protect against this business threat. The level of cover should be based on an estimate of the losses a business would incur should it lose a key employee in this way. Similarly, share protection insurance can provide cash at the right time to ensure the shares of a company remain with the company and do not pass to the deceased share holder’s family.
Employers can also arrange group life assurance, critical illness, income protection or private medical schemes for employees. These policies pay out to employees or their dependents in the event of death, critical illness, loss of income due to long term illness or accident and can pay for private medical treatment. Employers who set up insurance for their staff will usually benefit from tax breaks for doing so and an IFA will be able to advise on the tax position.
Other types of cover include business interruption insurance, credit insurance and, in an increasingly litigious era, legal expenses insurance.
Occupying your own business property, rather than merely using a copy of the landlord’s keys, can be a source of great satisfaction and can prove to be very cost effective. In order to own your business premises, it is likely that a commercial mortgage is required.
Businesses need to be on a relatively secure financial footing before applying for a commercial mortgage. Commercial borrowers are considered to be a higher risk in terms of loan repayment default than for example an employee with a residential mortgage. The repayment terms as a result are not as cheap as residential mortgages and a sizeable deposit will be required. The majority of commercial lenders are likely to lend between 70 and 80 per cent of a property’s value. In addition, interest rates will be higher than those attached to residential loans – typically between 2 per cent and 4 per cent above the Bank of England base rate.
Arrangement fees on some products are negotiated on a case by case basis. Where charges are stipulated, they tend to range between 0.25 per cent and 1.25 per cent. Most lenders set a minimum level for the advance they are prepared to make, ranging between £15,000 and £100,000. Some also specify the maximum amount available to borrowers.
Businesses can also take advantage of tax allowances, by claiming back some of the costs of a commercial mortgage.
Employee perks
Employers might also want to consider providing incentives to help attract and retain staff. Employee perks can range from private health cover to company cars to gym membership.
An increasing number of small businesses are thinking about offering Enterprise Management Incentives which are tax advantaged share options designed to help small higher risk companies recruit and retain employees with the skills that will help them grow and succeed. They are also designed to reward employees for taking a risk by investing their time and skills in helping small companies achieve their potential.
An IFA can help employers find an incentive scheme that is suitable to their needs and fits within their budget. They will also do the maths to calculate the most cost efficient means of providing such incentives, as well as advising businesses of any relevant tax breaks.
Use the flowchart overleaf
For further information on the subject contained in this guide, please contact your IFA.
If you do not already have an IFA, our ‘Find an IFA’ hotlines and website enable you to confidentially search for a list of IFAs in your local area. You can search for an IFA based on a whole host of criteria (including product, qualifications, gender and payment options) so you can be sure you’ll find an IFA that meets your precise requirements.
If you are looking for financial advice for your business call the IFA Promotion Corporate Hotline on 0800 085 3251.
If you are looking for advice on personal finances call the IFA Promotion Consumer Hotline on 0800 085 3250.
Alternatively, for both services visit our website at www.unbiased.co.uk
Printed guides available:
- Independent Financial Advice for consumers
- ISA guide
- Investment guide
- Get saving guide
Printed factsheets available:
- Planning for your family
- A parents guide to education fees planning
- Ethical investment – making money with a clear conscience
- The basics of offshore and expatriate finances
- An introduction to insurance
To request one of the above guides or factsheets, please call our Hotline on 0800 085 3250 or visit us at www.unbiased.co.uk
The above guides are available in the following alternative formats: large print, Braille and audio tape. Please call our Hotline on 0800 085 3250 if you wish to order an alternative format.
Other guides available online:
- ISA guide
- Pension guide
- Take Tax Action guide
- The financial practicalities of bereavement guide
- Housing market uncertainty guide
- Equity Release guide
- Surviving an economic downturn guide
- Guide to IFA qualifications
Other factsheets available online:
- Planning for your family
- A parents guide to education fees planning
- Long term care
- Confused about endowments?
- Funding for university
- Remortgaging your home?
- Get your Key Facts straight for financial advice
IFA Promotion Ltd.
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This booklet has been approved by a person authorised and regulated by the Financial Services Authority. Based on current understanding of UK legislation and tax practice which is subject to future change. This brochure is for information purposes only. IFA Promotion can accept no liability for any action which an investor takes based on this information. The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trademarks of IFA Promotion Limited.
December 2007
