The tax break on independent pensions advice worth up to £150 per employee a year may seem appealing, but does it go far enough, asks Stephanie Spicer
Staff are increasingly looking to their employers to provide them with information about their pension scheme. However, communicating the way a pension works is also in the interests of the employer, if only to ensure that the employee fully understands the value of the perk.
There is an under-utilised tax break to help employers ensure their staff are making the most of their pension scheme, whereby they can provide each employee with a tax-exempt benefit of up to £150-worth of pensions advice every year.
But according to Employee Benefits/Axa Sun Life Pensions research 2007 only 9% of employers say they have made use of the tax break and just 12% have plans to do so. The problem seems to be the pervading view that £150 buys very little financial advice, which could also explain why 46% of employers that have not used the incentive have no plans to do so.
There is a fine line between giving guidance to employees on their options and actually giving advice on the amount they should contribute and, in the case of a defined contribution scheme, which investments to select. While employers can provide general information about the pension scheme, they are not usually authorised to provide advice.
Steve Charlton, principal at Punter Southall, says: “It would be better for a third party to [give] that information. Most consultants are authorised and regulated by the Financial Services Authority [to provide advice], are aware of where guidance stops and advice starts, and can sit one side of the line or the other if an employer pays them to do so.”
Under HM Revenue & Customs’ (HMRC) rules, pensions information and guidance provided by an employer to employees generally, for example through a seminar to all staff, is unlikely to give rise to an employee benefit tax charge. The rules state: “Where an employer pays fees to an external provider for one-to-one sessions to provide advice to [staff], as a general principle, a tax charge will arise on the cost of the advice as this represents an employment-related perk.”
However, since December 2004, HMRC has exempted from a benefits charge, the cost of pensions advice and information provided specifically to an employee, as long as similar advice is offered to all staff – and the scope of the advice does not extend beyond pensions – at no more than £150 per employee per year.
Employers may decide to use an external provider to provide advice or simply to help with general guidance around pensions. “If the employer wants us to just outline the benefits of scheme membership but not give advice, which can be costly, then we can do that and go a long way down that line as to what the options are and what the outcomes might be. The employer should make sure the right people are talking at the right level to their members,” says Charlton.
Pension providers often also offer seminars, pension investment modellers and one-to-one advice sessions for staff. All employers need to do is provide the employee with the time during the working day to take advantage of these services.
However, employers may decide there is a need for employees to receive independent advice, which is where the tax break can be utilised. But not everyone is convinced of the value of the tax break. Jonathan Watts-Lay, director at JPMorgan Invest, says: “If employers go down the advice route and bring an external party in, no-one will provide advice for less than £150 and if they go above the £150 then none of it is exempt. Economically it doesn’t work.
“There is a debate, which says [that] if you educate employees properly about pensions, what they should be paying in and what their options are, then a lot of people won’t need individual advice, [except] perhaps [staff] approaching retirement.”
Ian Buchan, brand development manager (corporate benefits) at Standard Life, argues there is another way for employees to get tax-efficient advice. “Our group personal pension contracts allow individuals to use the money in their fund to get advice. They will have paid no tax on their money going in, the money grosses up and the cost of the independent financial adviser doesn’t attract value added tax (VAT) because it is done through commission. It means if the individual puts in £60 to their pension they could buy £100 of advice.”
Alternatively, employers can use the services of an on-site adviser, says Buchan. “If you have a workforce of 2,000 [employees] and the employer is happy putting £150 [per person a year] for them to get advice, that is £300,000 per annum. They could realistically pay an on-site adviser a salary of £70,000 to do that, [and] perhaps base them in the HR department where they can give staff financial advice whenever they want.”
There are a number of options for employers to consider in helping employees learn more about their pension, and while the tax break can help, it is only one part of the equation.