Cost-cutting bosses are targeting company perks
Beware the real cost of eroding benefits
Sunday 31 May 2009
Thousands of employees could face creeping benefits withdrawals, experts warn, as businesses look for new ways to cut costs. But in losing your benefits, you could be losing far more than you think.
Surviving a recession is all about cost cutting, and employers are saving money by slashing benefits. Making such cuts can often save firms more than the face value of these benefits. But often it costs companies less to provide them than it would cost you to buy them independently, while others come with tax relief attached.
Offering benefits – such as company cars, childcare vouchers, private medical insurance, pension schemes and more – has always been a way for businesses to attract workers. However, these optional extras are beneficial for the company too.
"This is a benefit for the employer," says Charles Cotton, reward adviser for the Chartered Institute of Personnel and Development, "because it alleviates pressures to raise base pay, which would otherwise allow employees to buy the same things on the open market." Offering certain perks can also allow employers to qualify for valuable tax reliefs, helping them to trim costs.
But slashing benefits could see employees losing far more than their face value. "When it comes to taxing benefits, their value is calculated by the extra a company pays to provide them," says Clive Gawthorpe, a tax partner at accountants UHY Hacker Young. But the price the company pays for health insurance, say, is usually far lower than on the open market. "People expect to have health cover in their jobs," Mr Gawthorpe says. "But the cost of paying for it themselves would exceed the value that it will cost the employer because companies can buy in bulk."
However, it's your employee pension that could really cost you money. The value of an employer's contribution to your pension is not just the actual amount they invest for you over time, but also the return the investment accrues. If an employer stops paying contributions you are losing not just the initial investment, but the eventual return as well, a figure that stands to be a lot higher, and you may feel the financial effects for the rest of your life.
One way of making up for the loss of future returns is to opt for salary sacrifice in order to retain benefits. This could mean your employer would continue to contribute to your pension. Employers are likely to look favourably on such a compromise as it affords them tax relief – they do not have to pay National Insurance on what they contribute to your pension. This is also the case for childcare vouchers. But salary sacrifice is not an option for all types of benefits. As Mr Cotton says: "There is a concern for employers if they used types of salary sacrifice other than tax relief benefits such as pensions and childcare, that the salary sacrifice loophole would be closed up."
To find out the true value of what you stand to lose if your benefits are reduced, you can request a total rewards statement from your employer. From this, you will be able to decide their cash value, and the value to yourself, and choose which ones are worth keeping and which you can happily give up.
"It's about how much it's worth to you," says Mr Gawthorpe. "Cutting a benefit that isn't really desired isn't a big deal. It's the balance of making things more tax efficient and making savings for the individual that counts."
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