Choosing the right pension scheme for your company

Confused by the choices on offer? Here’s a summary of your options

Company pension schemes vary from business to business, however there are two main types of private pension scheme that you must choose from as an employer: final-salary schemes and money-purchase schemes. Whichever pension scheme you decide on for your employees, you need to clearly understand the relevant regulations and tax implications for each.

Final-salary pension schemesAlso known as salary-related or defined benefit schemes, these are normally based on an individual’s final earnings at, or near, retirement and how long they were involved in the scheme. In general, these schemes operate through a trust that receives contributions from both you as an employer and your employees, and it pays out members’ benefits. The objectives of the trust are laid out in the trust deed, while the day-to-day decisions are made by the trustees.

It’s important to be aware of the legal obligations that govern the relationship between you, the employer, the trust and the employee. These are as follows:

  • The employer is bound, like the employee, by the legal obligations of the contract of employment, such as the payment of pension contributions
  • All trustees must act in the interests of all the beneficiaries of the scheme
  • The employer is responsible for notifying the Pensions Regulator if there is any reason to believe there are problems or wrongdoings occurring in the scheme
  • The employer must ensure that any employee contributions deducted from pay reach the pension scheme within 19 days of the end of the month in which they were deducted, and that any employer contribution arrives when it is due
  • The employer must make sure that the assets of the pension fund are kept totally separate from those of the business
  • The employer is responsible for ensuring that employees are informed and consulted on developments that affect the pension fund
  • Trustees must be assisted in carrying out their duties. For example, employee trustees should be given paid time off to undertake those duties and any necessary training

Final salary schemes are in fact used less and less these days, and as a small business it’s highly unlikely that you’ll choose this type of pension plan. Public-sector organisations and big companies are generally the only participants in such schemes.

Money-purchase pension schemesThese are also known as defined contribution schemes. The final amount an employee will receive will depend on a number of factors including: the amount of money paid in, the investment performance of the pension fund or how well the money has been invested, the age at which the fund is used to purchase an annuity, the level of annuity rates at the time and the additional benefits offered – such as spouses’ pensions. On retirement, your fund is used to provide your pension, usually by buying an annuity (a regular income for life).

Money-purchase schemes are themselves divided into different types: group stakeholder, group personal, and group money-purchase, although the latter is less popular among small businesses than the others.

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