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Employee Benefits: a simple guide
This is a vehicle for setting aside some of an employee’s income for retirement. There are several types. Most pensions these days are ‘defined contribution’ pensions. In this type of pension, an employee and their employer each put a set amount of money into the pension account each year. The value of the pension when the employee retires depends on what they’ve put in. Once they retire, the employee then has a pot of cash which they can use to buy themselves an annual income (like an annuity).
The main reason for getting a pension through work is that the employer will often contribute too.
The second type of pension is a ‘defined benefit pension’, and it’s becoming much less common in private sector companies. In this type of pension, the amount the employee gets when they retire is worked out using a formula, which typically looks at things like their final salary and how long they’ve worked there.
It’s also worth knowing that, from 2012, large employers have had to start automatically enrolling most of their employees in a pension scheme. They’ll also have to pay a minimum contribution for most employees. Smaller employers will start having to do the same over the following few years. There’s more information at www.nestpensions.org.uk
Most employees are entitled to £88.45 a week (2015- 2016) after their first 4 days off sick. It’s called Statutory Sick Pay, and covers them for their first 6 months off because of illness or injury. Employers sometimes offer more sick pay than this (it’s often called Occupational Sick Pay – OSP), or offer employees cover for a longer period. It’s worth an employee finding out how much they’d be paid, and how long for, because it’ll help them decide which other sorts of cover they might need.
Sick Pay Insurance provides short-term financial support for sickness absence. It can start from as little as one week’s absence and generally pays out for up to one year’s absence.
Income Protection (IP)
Income Protection pays a percentage of an employee’s salary each month (typically 60-80%) as a regular income, if they can’t work due to a long-term illness or injury. Getting Income Protection through an employer (it’s called Group Income Protection) will often mean that medical conditions that an employee has prior to the policy are covered. It’s also often a lower cost for an employer than if an employee took out a similar policy themselves because the chance of someone claiming is spread across all those covered.
Income Protection policies can be set up in different ways by an employer. Usually, they’re set up so that payments start once Statutory Sick Pay or Occupational Sick Pay end. Most Income Protection policies start after 6 months off work. The payments continue until either the employee goes back to work, or reaches the retirement age given in the policy. Some policies have a ‘limited term’ which means they only pay out up to a set time – say 2, 3 or 5 years off work, rather than to retirement age.
Private Medical Insurance (PMI)
Private Medical Insurance pays for the cost of private treatment for medical problems. It doesn’t cover every medical condition, so it’s important for employees to check the policy details to see what’s covered. Employers decide which pre-existing conditions are covered. PMI pays for the costs of treatment: it doesn’t help supplement an employee’s income while they’re off work. It’s also a taxable benefit.
Dental and Optical insurance:
These are a bit like PMI, but more specific. Typically, corporate dental insurance covers the cost of routine NHS treatments like examinations, hygienists, fillings, crowns etc. as well as injuries and accidents – anywhere in the world. It also contributes towards the cost of more expensive treatments such as implants and child orthodontics.
Optical insurance helps pay for eye tests, glasses and contact lenses, and often pays out a lump sum in the event of accidental and permanent sight loss. Cover for both can normally be extended to cover family members. And like PMI, dental insurance pays towards the cost of private treatment up to a set limit.
Critical Illness Insurance (CII)
Critical Illness Insurance means an employee will get a tax-free lump sum if they’re diagnosed with one of a number of specific medical conditions (the insurance company will have a list of exactly which medical conditions the policy will pay out for). To get the payout, the employee needs to have one of the conditions on the list, and they usually have to survive for a minimum period of time once they’re diagnosed (usually between 14 and 28 days).
Health screening provides a regular health check. This usually involves a physical examination to identify any current conditions an employee might not be aware of, but will also involve questions to help work out which diseases they may be at risk of, and how they can improve their health by changing their lifestyle.
Childcare vouchers are taken out of an employee’s salary before tax and National Insurance through something called ‘salary sacrifice’. That means that where they could have, for example,
£700 in their pay cheque over the year, they can choose to get
£1,000 of vouchers instead (though the exact amounts will depend on how much tax they pay). These vouchers can be used to pay for nursery, preschool, a nanny or a childminder up until a child’s 15th birthday.
A car allowance means that an employee gets an extra payment to allow them to buy a car for their work. Some employers give a mileage allowance, which means an employee gets a certain amount for each mile driven on company business. This will replace the old company car schemes, which are gradually being phased out.
Interest Free Travel Loan
Some employers will offer an interest free loan of up to £5,000 to allow employees to buy an annual travel card or season ticket (they’re usually cheaper than buying daily, weekly or monthly tickets).
Some employers will give employees a free gym membership; others will offer a discounted rate at a local gym or gym chain. Gym membership is a taxable benefit, so employees will pay a bit towards it.