Employee Benefits in Financial Planning
In this article, we take a look at the pros and cons of financial planning-related employee benefits – relevant to the CII’s R05, R06, and AF5 exams.
This article is correct as at 17 October 2024.
Employee Benefits
While employee benefits may be viewed as a perk of the job, they are essentially a form of non-salaried compensation provided in addition to an employee’s regular salary. They may serve to attract and retain employees.
In terms of financial planning-related employee benefits, the main ones are:
- Death in service: the employer pays a lump sum, often a multiple of salary, to the employee’s nominated beneficiary(ies) in the event of their death while employed at the company (i.e., pre-retirement).
- Group income protection: the employer pays an income, usually related to salary, to the employee in the event that they are unable to work due to incapacity (e.g., sickness or accident).
- Group critical illness cover: the employer pays a lump sum, which may be a multiple of salary, to the employee in the event that they are diagnosed with a critical illness that is covered by the employer’s policy.
- Group private medical insurance: a health insurance policy provided by the employer that covers the medical expenses of the employee (and sometimes their dependants) in the event that they require treatment.
Tax Treatment of Employee Benefits
It’s worth noting the tax treatment of employee benefits:
Premium | Benefit |
|
|---|---|---|
| Death in service | The employer pays the premium, but it is not taxable as a benefit in kind. | No tax payable. |
| Group income protection | The employer pays the premium, but it is not taxable as a benefit in kind. | Paid out after income tax and National Insurance contributions have been deducted. |
| Group critical illness cover | If the employer pays the premium, this is taxable as a benefit in kind. | No tax payable. |
| Group private medical insurance | If the employer pays the premium, this is taxable as a benefit in kind. | No tax payable. |
Advantages of Employee Benefits
Employee benefits offer advantages for employees and employers alike, including:
- Peace of Mind: Knowing that these benefits are in place can reduce stress and anxiety for employees, allowing them to focus on their work and personal lives without worrying about financial vulnerabilities.
- Enhanced Well-Being: Access to healthcare services through group PMI and support during long-term illness via group income protection contributes to overall employee health and well-being.
- Attraction and Retention of Talent: Offering these benefits enhances the overall employment package, making the company more appealing to potential recruits and helping to retain existing employees.
- Improved Employee Morale and Engagement: Providing security through these benefits can boost employee morale and engagement, leading to a more motivated and productive workforce.
- Reduced Absenteeism: Access to healthcare through group PMI and financial support from group income protection can lead to quicker recoveries and reduced absenteeism, benefiting overall productivity.
Disadvantages of Employee Benefits
There are, of course, some downsides:
- Tax Implications: In some cases, the benefits received from these policies may be subject to tax, reducing the net benefit.
- Limited Flexibility: Employees may not have much choice in the level of coverage or benefits offered under group policies. The benefits are usually standardised across the workforce, which may not meet every employee’s individual needs or preferences.
- Dependency on Employer: These benefits are tied to employment, so if the employee leaves the company, they typically lose the coverage. This creates a dependency on the employer for continued financial protection.
- Coverage Limitations: Group policies may have exclusions or limits on coverage. For example, Group CIC may not cover certain critical illnesses, or Group PMI may have restrictions on specific treatments or hospitals. Employees might need to purchase additional personal insurance to fill in any gaps.
- Potential for Over-Reliance: Employees might rely too heavily on these employer-provided benefits, neglecting to secure their own personal insurance policies, which could leave them underprotected if they change jobs or the employer alters the benefits package.
- Administration and Cost: Offering these benefits can be time-consuming and expensive for employers, especially for smaller businesses. Premiums can add significant costs to the company’s overall compensation structure and may rise over time.
Summary
Employee benefits play a vital role in providing security and peace of mind. These benefits not only provide financial safety nets but also contribute to overall well-being, helping employees focus on their work and personal lives without worrying about what might happen in case of illness or injury. However, it’s important not to rely solely on employer-provided benefits. These benefits can change or be lost on moving jobs, so while it’s beneficial to consider them as part of the financial planning process, they are unlikely to provide a complete solution to an individual’s financial protection needs.
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