What are common pitfalls with employee benefits?
In a recent webinar with financial adviser Gareth Carroll, we asked what some of the common mistakes that companies make with employee benefits. The answers were somewhat surprising. He discussed things that that business owners don’t always think of, or don’t realise how they impact benefit payouts. It was really great to have input from someone like Gareth who often has to try to help companies when they find themselves in a pickle. His best advice is to really understand what you have and what impacts policies and benefits as insurers can be quite rigid when it comes to the fine print. Here are his top tips on common employee benefit pitfalls.
1. Delayed submission of income protection claims
While many income protection policies have a waiting period before they pay out, companies should not delay in getting claims in. As soon as it becomes apparent that an employee will not be able to return to work for a period of time, lodge the claim. Make sure you understand what paperwork is required – whether it’s doctors letters or proof of hospital admission, and be diligent about submitting everything required in a timely manner. It takes time to process claims and there’s a lot of verification that needs to happen when these types of claims are lodged. If you only lodge the claim after 6 months of the employee being away from work, there’s a strong possibility they may have to wait another two to three months’ before receiving any form of payout.
2. Life Insurance and Trusts
Many companies fund employee life insurance as a benefit. Any benefit from these policies goes to the beneficiary via a trust. There are two options available here; firstly, for the company to have its own trust or secondly for the company to use an insurer’s Master Trust arrangement. Gareth advocates the latter for a variety of reasons – you won’t need a trustee banks account, insurers update their Trusts as legislation changes, they are run by professional trustees and lastly if doesn’t matter if you lose your copy of the Trust.
3. Limited Payments
Another characteristic of the modern marketplace is that people switch jobs often. Today it is seen as good if employees stay more than 3 years in a particular role or at the same company. Therefore, setting up an income protection that pays until retirement doesn’t make a lot of sense. Many companies now offer income protection with a payment term of 5 years, this makes the benefit that much more – think half price – and is one of the primary reason for a growth in the sales of income protection.
4. Don’t link life insurance to pension scheme
Some policies will have a default that links life insurance policies to a companies’ pension benefits. However, this is fraught with technicalities and can result in benefits not getting paid out when needed. Companies should ensure that they un-link these two types of policies to avoid any future issues.
5. Not implementing salary sacrifice
Most employees baulk at the idea of a salary sacrifice, until they understand the mechanisms (and benefits) of how it works. They think that by agreeing to a salary sacrifice they will be losing out, whereas in reality, the opposite is true. Salary Exchange is really a tax efficient way of making a pension contribution. By exchanging a portion of salary for an employer pension contribution National Insurance on that amount of salary is saved. Some employers share this saving with employees, some pass on the whole saving which can substantially boost the amount being contributed.
As you will see from these points above, setting up employee benefits can be tricky. It is really important to have a clear idea of what the benefit payouts will be down the line, as well as how each type of benefit can be structured. If you’re unsure, it’s always best to consult with a financial advisor who works with employee benefits daily. They will not only know what changes are happening in the industry but also be able to advise on common pitfalls to avoid.
Content sourced from Gareth Carroll of Becketts Financial Services during a HR Huddle Webinar 2021.
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