Small Business Advice Guide

Introduction

Competition, recruitment, tax, investment, profit and growth – these matters are uppermost in the mind of every successful employer. Trustworthy expert independent financial advice has a valuable role to play in many of these areas, saving hard-pressed directors’ and employers’ time and money while delivering financial security to employees through the provision of financial advice.

Financial advisers help businesses achieve or remain in their best possible shape in numerous ways, for example by making sure they stay on top of the ever-changing tax rules and obligations to provide access to pension plans and other employee benefits. Then there is the tricky territory of providing pensions for employees which is set for another shake-up in the next few years. Financial advisers ensure firms have the right protection to cope with all eventualities but, equally, are getting good value from their insurance plans. They can also help those in charge of human resources consider the latest tax-friendly incentive schemes which could attract, motivate and reward staff. And people, as every business knows, are its most valuable asset.

Independent financial advisers and employee benefit consultants work alongside businesses and make financial planning recommendations to both employers and employees to help achieve stated objectives.

With the huge array of financial products available and the many routes that can be taken to find financial advice, how can a company be absolutely confident that the course of action that is being recommended to provide employee benefits or financial planning advice for the company is entirely in the company’s own best interests?

Financial decisions are far reaching and can impact on a firm’s bottom line for years to come. So how does a firm go about ensuring the advice it is getting is utterly impartial, is exactly tailored to its individual needs and, crucially, is only being recommended after the adviser has searched the whole of the market?�
Why Independent Financial Advisers (IFAs) and Employee Benefit Consultants are well placed to give impartial advice

The best financial advice can be summed up as: impartial, affordable, suitable and transparent.

The advice a business receives depends on who is giving it and how impartial they are. Do not confuse sales of financial products with financial advice, although both are important and must be paid for. It may be that your business just needs advice on the existing financial products it has in place and does not need to pay for additional financial products.  

Employers must know the status of their financial adviser as this will help them assess the value of the advice and its impartiality before committing to taking action based on it.

Currently there are three types of financial advisers: 

• Tied agents can only offer product recommendations from one financial services provider;
• Multi-tied agents can only advise on the products of a restricted range of providers;

And

• Independent financial advisers (IFAs) and employee benefit consultants who search the whole of the market for their clients.

The Financial Services Authority has proposed changes to the current system under its Retail Distribution Review (RDR).  We will therefore update this guide to reflect industry changes as and when they are introduced.

Financial advisers of all types are required to give a clear and up-front explanation of the services they offer and how they charge for their services.

Employers will, of course, have to pay for the advice they receive. The choice is to allow your financial adviser to take commission from the products they arrange for you and your company 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. The impartiality of IFAs means they are obliged to offer this choice of being able to pay by a fee, tied agents are not. The important point is that you will know what is being charged and what exactly is being paid for.

Independent financial advisers will inform you in writing at your first meeting how you can pay them and the likely amounts involved. It is becoming increasingly popular for IFAs and Employee Benefit Consultants not to take commission from product sales but to charge on a fee basis. The implications of each route – fees, commission or a combination will be explained to you before you decide what is best for your company.

Remember that only IFAs and employee benefit consultants can access the widest range of financial products available giving them an unequalled capability to 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 benefits package. After highlighting any areas it may make sense to review, he or she can pinpoint what precise actions would be appropriate. Normally a comprehensive report will be prepared by the IFA or employee benefit consultant which will contain a professional opinion about your current position and the future implications of any financial arrangements in place or about to be recommended. 

The constant flow of new legislation from government and the strict compliance obligations to be met mean that no business can risk losing touch with its responsibilities. As well bringing firms up-to-date with regulatory changes, an IFA or Employee Benefit Consultant will help employers and staff to secure the best outcome from any financial decisions they make.

Now you have a clearer understanding of how the advice market works, try answering the series of questions in the decision tree at the end of this guide and discover what type of advice you would prefer for your business.
Pension responsibilities and choosing the right package

Alarmists may call pensions a minefield; what is sure is no one finds pensions easy and specific expertise in knowing what is available from the entire market can make the difference of thousands of pounds at retirement.   Pensions are a particular area where employers could do themselves an enormous favour by warding off disruption further down the line and getting to grips with the pension changes arriving in 2012. This is when workplace contributory plans for lower paid workers called Personal Accounts will be introduced.

Designed to respond to continuing concerns that we are not saving enough for our old age, these will be low-charge personal plans for every worker who does not already have access to a pension. They will co-exist, replace or evolve from existing stakeholder pension schemes.

With no alternative in place, employers and workers will be obliged to open and automatically enrol in Personal Accounts. Those wanting to opt out have actively to do so. Employees will contribute 3 per cent of their pay with employers putting in 4 per cent. The cost burden falling on businesses will be considerable: increased administration requirement to set up and run the schemes as well as more funds to pay contributions if the firm does not have a pension system in place already. Fixed penalties are anticipated for non-compliance. Taking independent financial advice in advance on Personal Accounts and the best way to set money aside to fund them is highly advisable. �
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Stakeholder pension legislation currently compels businesses with five or more employees to provide their employees with access to a pension plan which falls within the regulations. These are designed as low-cost, flexible plans with annual charges pegged at 1.5 per cent. Members must be able to transfer funds in and out of schemes 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 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 or occupational pension scheme can be offered to employees and/or directors. IFAs will look closely at the varying needs of retirement funding for individuals, and consider benefits such as death in service and waiver of premiums, while directors may want to take early retirement.  Regular reviews are important to ensure that any plans to deliver employee benefits are doing so as expected.

To avoid making an important pension decision by yourself a discussion with an IFA can help you choose from the hundreds of options available from all the pension providers, enabling you to select the best solution for the company itself and for its employees.

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 per cent all employees’ salaries. One of the best incentives for employees to join a pension scheme is employer contributions, something Personal Accounts underlines. There are other plus points for group personal pensions as they offer more options than stakeholder ones, such as a larger choice of investment funds, although group personal pensions may be more expensive. This is where an IFA can help decide what is right for you. 

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 a final salary scheme continues being available to all employees who wish to join or whether a new money purchase scheme is offered to employees, based on contributions paid and the performance of the fund/s where the contributions are invested. Pension simplification has made some choices easier for employers but in some cases it has made pension financial choices more complex through measures such as lifetime limits and the annual allowance.

Insurance – picking the right policy to protect you when you need it most

Businesses need to ensure they have the right policies in place so should the worst happen they can be put back on a sound financial footing with minimal difficulty.

Protection comes in a multitude of forms covering every aspect of a firm’s daily activities. These include damage, loss or theft of physical assets like buildings, contents, machinery, IT equipment and vehicles, as well external risks such as flooding. Credit and bad debt cover will be required as well as requisite public and product liability insurance to protect against legal action from customers, suppliers or the public. Cover to resolve a dispute such as interruption of production or supply or employment issues may also be necessary. Legal expenses cover, more common in an increasingly litigious age, should take account of any costs or expenses that might be awarded.
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Employers’ responsibilities are set down in the Health and Safety at Work Act, but they might also consider potential actions arising from other sources like tax probes courtesy of HM Revenue & Customs, National Insurance enquiries, investigations from Trading Standards and Companies House. Company shareholders and directors face more demanding compliance standards these days with the Companies Act. Those that stand as trustees can be personally liable if they fail in their duties as a trustee, so indemnity cover is also worth exploring.

But trawling through such a multitude of policies and their small print takes time businesses can ill afford. However just as crucial as getting the right cover so you have what is needed, is being clear about what is not included. An IFA is ideally positioned to sift through all the conditions so you get the right cover at the right price.

Employees are a business’ top resource, ultimately driving its success or failure. Therefore it could also pay to assess whether or not other forms of personal insurance should be taken out.  For example, some companies rely heavily on a handful of key staff members. If one of these individuals should die, the company may lose profitable contracts, be unable to continue with a vital project or even forced to close. Key man insurance (life assurance taken out by the company on the life of an essential employee) can protect against such threats that could jeopardise the livelihood of many others. Similarly share protection insurance can provide cash at the right time to ensure a company’s shares remain with the company and do not pass to the deceased shareholder’s beneficiaries who may have no relevant experience or knowledge of the business.

Employers can also arrange group life assurance, critical illness, income protection or private medical schemes for employees. These plans pay out to the employee or their dependents in the event of death, serious illness, loss of earnings due to ill health or accident, and can also pay for private medical treatment. Employers who set up insurance for their staff will usually benefit from tax breaks and an IFA or employee benefits consultant can advise on the advantages.

Commercial mortgages

Purchasing their own premises can be a very smart move for most businesses. A business can thereby gain from rising property prices, save on rent and enjoy tax advantages, thus putting it onto a more stable financial footing and helping it to grow stronger and potentially expand..

To purchase your own business premises, you will need a commercial mortgage, which can be used not just to buy property and land, but as a potentially cost-effective way to raise money for capital expenditure such as purchasing machinery. hiring extra staff or acquisitions.

Depending on your business objectives, an IFA can assess whether borrowing in this way is the best option, by looking at the context of the business as a whole. He or she can determine whether alternatives like leasing or invoice discounting may serve a firm’s purpose better. Where raising money is concerned a mixed solution is often the best. An IFA is in the right position to achieve that and can present a persuasive, informed case to lenders.

Commercial mortgages are more expensive than home loans as they involve higher risks for lenders and work on different principles taking in a variety of factors pertinent to the actual business wanting to do the borrowing. Businesses need to be on a secure financial footing with an established track record. Such are the specifics of lending criteria it is not unusual that two similar properties in the same street would get different answers from lenders as it really comes down to the businesses themselves.

Criteria include the amount of the loan to the value of the property to be bought, how good a business might be at servicing this kind of debt and, vitally, what kind of industry sector it operates in. Some sectors may need as much as a 40 per cent deposit. Another factor that may influence lenders is the potential for cross-selling to the business, for example where a lender could also take over the daily business banking as well in the deal.

Generally commercial loans require at least a 20 per cent deposit. Rates are higher than residential mortgages – usually 2 to 4 per cent above the Bank of England base rate. However in developing areas and enterprise zones more competitive rates can be achieved. 

Commercial mortgage specialist IFAs are invariably confident that their ability to source and compile mixed packages from the entire market results in better rates than if a business made a direct approach to say a bank.
Employee perks

Competition for skills is getting hotter, so employers may well want to consider providing incentives to help attract and retain staff. Employee perks can range from private health cover to company cars, gym membership or even financial packages including death in service benefits for beneficiaries.

However an increasing number of businesses are realising the latest range of employee share option schemes include significant tax and national insurance cost advantages. In these employees can receive free shares, options to buy them at specified prices after a period of time or buy shares directly, sometimes matched with free ones. IFAs can have a highly valuable input here, assessing each plan’s pros and cons, and then handling the set-up and management so businesses find making a decision not just profitable but time effective too.

HM Revenue & Customs approved schemes are the ones with tax and National Insurance benefits. Taxed plans do not, but may have other aspects that make them more suitable for a particular firm.

Revenue approved plans include CSOP (Company Share Option Plans up to £30,000) and EMI (Enterprise Management Incentives up to £100,000 per individual) are for smaller, younger, higher-risk companies to help them keep selected employees with scarce skills willing to invest their time and expertise in helping such ventures achieve their potential.

SIPs (Share Incentive Plans) and Save as You Earn (SAYE) plans are tax efficient ways to reward all employees. SIPs involve the giving of free shares, buying partnership ones and receiving matching shares all held in a trust. SAYE schemes allow employees to save between £5 and £250 a month for up to seven years with a bonus on completing the plan.

An IFA can help employers find an incentive scheme that is suitable to their needs and fits within their budget. They will also crunch the numbers to identify the most cost-efficient means of providing such incentives, as well as advising businesses on any relevant tax breaks. They may settle on a combination, for example with an Enterprise Management Incentive scheme for directors and a Share Incentive Plan for other staff. They can also advise if the tax conditions change.

The value of the advice from an IFA or an employee benefits consultant in employee benefits and employee share option schemes can be extremely useful to a business.

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