What are the tax and legal implications when setting up a staff pension scheme?

Setting up a pension fund trust could benefit you and your staff

Setting up a pension fund trust is a condition of Inland Revenue approval and approval means eligibility for tax breaks. Such favourable treatment makes all employee contributions tax exempt and allows all employer’s contributions as trading expenses.  What’s more, unlike any other benefit, pension fund contributions are exempt from benefit-in-kind tax. The final pension paid is taxable, but the investment, income and capital gains of the scheme are mostly exempt.

Trusts are established with a simple written, signed and delivered document. This deed outlines the basic trust provisions and details the procedures for transfers, investment, and the appointment and removal of trustees. There will also be some information concerning the actual scheme contributions and benefits. Tax approval is not gained until the trust deed is established.

On the subject of tax, a few final words. Tax regulations on corporate pension schemes relate to the size and kind of benefits being made, and to social security contributions. It is possible to operate a scheme without adhering to these guidelines but such schemes will not receive the same favourable tax treatments. The requirements are that member’s pensions are generally limited to two thirds of final salary, while dependants’ provisions is limited to two thirds of that figure again. Death in service payments can not exceed four times the member’s pay.

Legal Requirements

In addition to this, the law requires schemes to meet a minimum funding requirement and to provide a compensation scheme for members to protect against fraud or theft. It is also necessary to have a stated procedure for resolving internal disputes, and to provide basic information about the scheme and how it operates to members.

Companies operating a scheme are also obliged to give members the option to make additional voluntary contributions (AVC’s). These contributions, however, must not exceed 15% of earnings in any one year and there are some tax limitations on these additional payments. By law, companies must also let members leaving the company move their accrued pensions out of the scheme.

Finally, corporate pension payments must be increased annually by 5% or the increase in the retail prices index – whichever figure is smaller.

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Before setting up a scheme, you need to look at options in the context of your long-term business vision. You need to be able to support a pension scheme financially for 20 to 30 years. There are cashflow considerations as well; your company may be highly profitable but still left scratching around for cash at the end of each month. On the other hand, things will be a lot easier if yours is a high margin business with payments made up-front and in cash.

Stakeholder funds

The Government introduced Stakeholder funds in 2001. These funds are basically another way for the Government to issue its ‘save all yea who may’ mantra! In reality, Stakeholders are simply pension funds with a new name.

Companies are not be obliged by law to have a pension scheme in place. However, they have to ensure that, as a bare minimum, employees can make contributions to an external, stakeholder pension through the company payroll system.

Investment Schemes

But, even if it is not possible to set up a pension scheme, companies can still offer employees some sort of investment scheme arrangement, whereby a percentage of salary is ‘looked after’ by the company. A lot of people view pensions schemes in this way – as a means of saving some salary before they get their hands on it.

Where to go for further advice

There’s no reason to be put off by perceived complications, as long as you plan carefully, and seek professional advise on a fee, not commission, basis. For further information, contact:

The Pensions Management Institute. Tel: 020 7247 1452

The Pensions Ombudsman. Tel: 020 7834 9144

Occupational Pensions Regulatory Authority. Tel: 01273 627 600

The Occupational Pensions Advisory Service. Tel: 020 7233 8080


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