Pensions

As an employer, contributing to employees’ pensions can be a tax-effective and attractive form of remuneration. For business owner-managers too, pensions are a useful way of funding retirement.

At the same time, providing access to a pension scheme is a legal requirement for many employers. From 2012, all employers will be required to provide employee pension arrangements and to make contributions.

Occupational pension schemes

Occupational pension schemes are set up by employers for their employees. Traditionally, large employers have offered ‘final salary’ (also known as defined benefit) pension schemes. In these, the pension the employee receives is based on length of service and final salary.

In a final salary scheme, employees are entitled to the specified pension amounts regardless of how well the pension schemes investments have performed. This can put the employer at risk: if the pension fund’s investments perform badly, the employer may have to make additional contributions.

An alternative form of occupational pension scheme, ‘money purchase’ (also known as defined contribution) removes this risk. Employers contribute a fixed percentage of employees’ salaries into the scheme. Employees’ pensions when they retire depend on how the investments have performed. Schemes like this typically allow employees to make additional voluntary contributions to top up their likely retirement pension.

Group personal pensions and stakeholder pensions

Occupational pension schemes can be expensive to administer and tend to be offered by large employers. For smaller businesses, providing access to personal pensions can be a better option. The scheme is run by a pension provider. Offering all employees access to pensions with the same provider – a group personal pension – can further reduce administration costs.

Personal pensions that meet specified requirements qualify as ‘stakeholder pensions’. A stakeholder pension must accept low monthly contributions and be portable when an employee changes job. The fees the pension provider can deduct from a stakeholder pension scheme are strictly limited.

Personal pension plans are money purchase schemes, so the employer is not required to make up any shortfall. Both employee and employer can make contributions, though the employer is not required to (unless contractually agreed). However, businesses with five or more employees that do not offer a contribution of at least 3 per cent of employees’ salaries are legally bound to provide access to a stakeholder pension scheme.

Pensions for directors and owner-managers

Different pension schemes may be appropriate for highly paid employees, company directors and owner managers. For example, some employers offer executive pension plans (EPP) tailored to individual executives. High earners can also be offered a self-investment pension plan (SIPP) offering greater investment flexibility.

For owner-managers, a small self-administered scheme (SSAS) may be an option. Schemes like this can use the pension fund to support the business: for example, through owning your commercial premises.

As with other pensions, key issues to consider include the levels of employer and employee contributions, the tax implications and what happens when an employee changes job. An independent financial adviser (IFA) with pensions expertise can advise you.