Considering an employee pension plan for a start-up company

What small business employers need to know about pensions and how to choose the right plan

What small business employers need to know about pensions and how to choose the right plan As life expectancy increases pensioners are spending more time enjoying retirement.

This however, means many people aren’t earning enough money throughout their lives to be able to support themselves when they reach their retirement age. The government is currently making changes to ensure that State Pension will be available to more people in the future.

While this can help, most people will want to supplement their state pension with their own savings to ensure that they can live comfortably.

As a result the government has made workplace pensions a responsibility of businesses in order to encourage people to use private pension plans. In many circumstances employers are required to enrol employees into workplace pension schemes. However, there are certain terms that workers must meet in order to become eligible:

  • Employees must be between the ages of 22 and state pension age (65 for men, 60 for women).
  • Employees must be earning more than £7,475.
  • Employees between 16 and 22, and from the state pension age to 75 have the option of opting to use workplace pension.
  • Employees earning lower than £7,475 have the option of opting to use workplace pension.

Employers are able to choose the pension scheme that their business will provide, as long as it meets the necessary requirements.

Defined contribution

Employers who choose a defined contribution scheme will have to contribute 3% of employees’ earnings to the pension scheme. This is for those who earn between £7,475 and £33,540. This is also supplemented by the workers’ own contributions of 1%.

In the future the government plans to raise the employee pension contribution to 3%; however the transition will be slow so that workers will be able to adjust to the changes. Most employers prefer using defined contribution schemes. With defined contribution plans employees will not be promised a percentage of salary when they reach retirement age. Instead the pension comes from the value of the pension fund.

The value of this fund depends on:

  • The overall amount of contributions that were paid by the employee and employer.
  • The investment performance of the pension fund.
  • The amount of fees which are charged to the pension company.

Most employer plans are set up as defined contribution plans.

Choosing the right plan

There are a number of different things that employers should consider when they are choosing a plan. All pension schemes should be able to compete with other companies to ensure that the employees remain happy and motivated. Sometimes it’s even a good idea to ask employees what they would want out of a pension plan. Budgets need to also be sufficiently evaluated before any providers are contacted.

It’s always important to find a good pension provider. In order for new businesses to make sure that they are using a reputable service they should always conduct significant research about the history of the pension provider, making sure they have a good reputation and can be trusted.

It’s also important to ensure that the pension scheme will comply with any future government changes.

Failing to perform these simple steps could not only waste a great deal of company time, but could be very costly in the future.

NOW: Pensions are an auto-enrolment specialist for company pensions and part of ATP, the largest pension fund in Denmark and among the largest in Europe. www.nowpensions.com

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