Pensions for employees - by independent financial adviser John Bramwell

Pensions for Employees
(Occupational Pensions)

Why provide a pension scheme?

Pensions are considered by most employees to be one of the best company benefits and to show a commitment by the employer to the long term future of the employee.

They provide a tax-efficient way of saving for retirement and National Insurance contributions (NICs) are not paid by either the employee or employer. Some employees even request their employer to pay a larger proportion of their salary as a pension contribution (salary sacrifice), thus reducing NICs for themselves and the employer.

By law companies with five or more employees (including temporary and part-time staff) must have a pension scheme available for all the employees, though there is no compulsion yet that any contributions must be made by the company.

What kinds of scheme are available?

The main ones are:

Specialist schemes - There are several schemes intended for directors and key staff, such as Executive Personal Pensions (EPP) and Small Self Administered Schemes (SSAS). These are often used to provide benefits in excess of those available elsewhere, to use assets such as company premises or to make loans to the employer's business. From A-Day many of these advantages over other schemes were lost, although existing benefits, such as higher amounts of tax-free cash at retirement, can be preserved if registered before 5th April 2009.

Final salary (defined benefit) schemes - These are the most well known pension schemes and provide an income on retirement based on the salary at retirement. Typically they provide a pension income determined by multiplying the salary at retirement by the number of years in the pension scheme and dividing by 60.

Contributions into the scheme are made by the employer. In most cases employees also contribute a percentage of their salary. These contributions are invested in a range of investments intended to grow at a rate equivalent to that needed to provide the scheme benefits. The employer has the responsibility for maintaining adequate levels of funding in the scheme. Recently this has led to many schemes closing, as the financial burden has been too great in the private sector. Most public sector schemes are based on final salary.

Money purchase (defined contribution) schemes - These are increasing in popularity (at least from an employer's point of view) as the benefits at retirement depend on the fund size and there is no compulsion for an employer to make up any difference if the expected pension is less than anticipated.

Personal pension (including Stakeholder) schemes - These are perhaps the simplest type of scheme to set up. They are typically group schemes in which a pension company holds separate accounts for each member. They are very flexible with the employee being able to select from a range of funds provided by the pension company.

Some employers make contributions into individual pension schemes, although group schemes are preferred as they generally reduce administration.

How do I select the best scheme for my business?

There are many factors to consider. For example, number of employees, budget, other benefits to be included, flexibility, financial strength of the pension provider and efficiency of administration. It is therefore important to obtain professional advice before selecting a scheme. Please contact us for further information.