Company Pensions for Employees and Owner Managers
Published / Last Updated on 17/05/2021
Company pension schemes and their features
Whether you are a small company, a larger business or looking at business directors pensions such as Executive arrangements or Small Self Administered Schemes (SSAS) there should be something here for you.
1.Group Personal Pension
A Group Personal Pension (GPP) has exactly the same rules as an individual Personal Pension Arrangements.
If you are a member of a GPP, we recommend that you also visit the individual personal pension pages to find out about them.
The only basic difference between an Individual Personal Pension and a Group Personal Pension is how the administration of the pension scheme is done.
A GPP is a series of individual personal pension arrangements for employees with the administration generally done by the employer. The employer will normally collect any contributions you wish to make from your salary and pay it across to your pension provider. This is normally done on a weekly or monthly basis depending on how you are normally paid.
It can be a very beneficial and tax efficient way for an employer to offer extra benefits for employees such as making contributions into the pension plan. It can also prove beneficial from an employers point of view as the costs are controlled with regard to any employer contributions. Visit the Employers Centre and controlling costs.
Employers: Beware Pension Laws and Workplace Pensions Rules
Care should be taken though, from an employers point of view, as there are Stakeholder Pensions Laws which may affect a GPP scheme run for employees.
2. Company Life Insurance and Sickness Insurance Schemes
For Directors and Business Owners:
Many business owners need to protect themselves. Many may elect to start company benefits schemes for all employees, including themselves, others may prefer to establish their own
These types of scheme are used to protect the ongoing stability of the business.
Benefits For Employees - (sometimes known as Group Risk Benefits)
The days of staying in the same job for life are possibly now a thing of the past. This can cause problems for employers, especially where hard working, skilled staff move on to pastures new. The costs and time involved in recruiting and training new staff soon mount up and then they move on.
By putting certain benefit packages in place for employees it can help reduce the chances of skilled and valued staff leaving - not only because they feel more looked after, but because other employers may not offer the same benefits.
Types of Group Risk Benefits Available
Life Cover - Company Life Insurance Schemes:
Group life assurance polices (or death in service policies) can provide a lump sum of money if an employee dies. The amount is usually calculated on a multiple of salary - maybe three or four times. This type of benefit is likely to appeal to staff who have partners and children.
Income Protection - Company Sickness Schemes:
Group policies can be set up to cover an employee against long term sickness and disabilities by providing a monthly income. These policies can be beneficial where your company only pays a person's salary for a limited time when they are off sick. If the employee has no other provision, they could be receiving State benefits of approximately £60 per week during sickness - how much more does your average employee earn? Would it put added stress on them?
Private Medical Insurance PMI - Company or Group:
This type of policy allows people to receive private medical care for a number of conditions, rather than relying on the NHS. Private Medical Insurance policies can also include partners and children, so it is likely to appeal to your employees in this position. This cover can also be beneficial for your key employees to try and minimise the time off work, waiting for treatment or an operation.
The benefits on all of these are also allowable as a business expense.
Review your existing arrangements and/or get an idea of costs to establish simple, cost effective, benefits packages that are not expensive but can prove an exceptional benefit for your employees, both from a welfare point of view but also from a worth point of view.
3. Defined Contribution (otherwise known as a Money Purchase Scheme)
Contributions are paid in and invested for you to build up rights in the scheme and become, in effect, your own investment fund.
The amount of pension you eventually get depends on the following:
- The value of the fund at the time you leave the scheme
- The amount which continues to be taken out in charges (although your employer may pay these separately)
- How well the fund continues to grow until you retire
- How much pension the investment fund can buy when you reach retirement (known as an Annuity - find out about Annuity Purchase)
With this type of scheme the member takes the investment risk because the benefits at retirement are purely based on the fund performance and the annuity rates in place when the retirement benefits are taken.
When retirement benefits start to be paid, like Defined Benefit (Final Salary Schemes), Limited Price Indexation comes into play. When an annuity is purchased with the value of a members pension fund, any fund accumulated from contributions from 6th April 1997 to buy pension benefits must increase at least in line with Retail Price Indexation, up to a maximum of 5% a year. Funds built up before April 1997 can also be used to purchase benefits increasing with Limited Price Indexation.
Maximum Retirement Benefits:
These are subject to Inland Revenue limits and a brief explanation of both the old and new rules are detailed in the Occupational Schemes Rules pages.
We recommend that you seek professional help when looking at Money Purchase Scheme retirement benefits. Contact us for help.
Contracting Out Via A Money Purchase Scheme - Protected Rights:
If you decide to contract out via a Money Purchase scheme, such as an Occupational Money Purchase (Defined Contribution) Scheme or indeed a Personal Pension Plan, your Contracted Out benefits become what is known as Protected Rights.
Whenever National Insurance rebates have been received, they are called Protected Rights and are built up separately from any other contributions made to the scheme. Protected Rights cannot be converted into tax free cash and the pension must not be taken before age 60 or earlier death.
When Protected Rights are converted into pension income they must be linked to increases in the Retail Prices Index but capped at:
- 3% a year if the rebates received related to earnings prior to 5 April 1997
- 5% a year if the rebates received related to earnings after 5 April 1997
Protected Rights and Death:
On death after the Protected Rights pension was taken by the member, if the member was married or in a civil partnership, the pension it provides must continue at half rate to the members spouse (as long as they have children or are over the age of 45).
On death before the Protected Rights pension was taken by the member, the whole of the Protected Rights fund must be used to provide a pension for a surviving spouse. If there is no surviving spouse, the Protected Rights can be paid as a lump sum to the estate of the member.
Pension Laws and Employers:
Care should be taken though from an employers point of view as the Government have introduced new Stakeholder Pensions Laws which may affect any occupational pension schemes ran for employees.
4. Group or Company Stakeholder Pensions
Did you know that if an employer is not exempt from stakeholder pension regulations they have got to offer employees access to a pension scheme and deduct contributions from payroll?
This became law on 6th April 2001.
Be aware: The Inland Revenue actively investigates employers who have not complied with the law.
Is your business affected? Visit theEmployer Centre.
Group or Company Stakeholder Pensions: Same as an Individual Stakeholder
Employer sponsored Stakeholder schemes are essentially the same as individual stakeholder pension schemes apart from the fact that an employer may be required to establish and run a scheme for employees. This is subject to certain conditions and criteria.
Some employers may be exempt if they are smaller firms or if they have gained exemptions from the rules because they have qualifying occupational pension schemes such as a money purchase scheme or a final salary scheme or grouped personal pension arrangements in place.
5.Trustee Investment Plan
These are investment policies offered by insurance companies for people who have Directors Small Self Administered Pension Arrangements (SSAS), private Self Invested Personal Pension Plans (SIPP) or larger self administered company pension schemes.
Some executive pensions will also allow this type of investment risk spreading arrangement.
The rules for schemes of this type will generally allow you to invest in a wider range of investments and companies - i.e. you do not have to keep all of your monies invested in one particular company or investment product.
Your existing pension scheme can write a cheque payable for the amount to be invested in another company, fill out a simple application form and invest in another insurance companies funds.
They are generally single premium (lump sum arrangements) although some companies do offer regular premium trustee investment policies.
The documentation is simple as it is normally only a one page application form for an investment made by your existing pension scheme. The new investment then sits inside the trust documentation of your main pension scheme.
Spread Your Investments
The benefits of spreading your investments with different companies are:
- You may gain access to a wider range of investment or life assurance company expertise.
- The funds themselves are generally "gross" pension funds, which means that they act in the same way as any other pension fund - that is they grow tax privileged.
- Charges on this type of arrangement are relatively low and funds are easily moved around and cashed in or moved from one provider to another.
How do I get a Trustee Investment Plan?
To obtain advice or further details contact us for help.
6. UURBS and FURBS are now known as EFRBS
Employer Financed Retirement Benefit Schemes
Unapproved schemes (or now unregistered schemes) are exactly what they say they are. They are employer financed retirement benefit schemes that technically have not been approved or registered by the HM Revenue and Customs and are therefore taxable.
Why would you want an unapproved scheme?
It used to be that employers wished to top up retirement benefits for employees or key staff because they earned a lot of money, in excess of old pension limits, or they wished their employee to have a larger pension than normal and used an unapproved scheme.
Law changes mean they are less popular now
Because pension laws changed in 2006 (Pension Simplification) meaning that employers could pay in huge sums into approved pension schemes for staff, the need for unapproved schemes has fallen dramatically.
Good for just a few: In certain circumstances, for people who are close to retirement and very close to the LifetimeAllowance limit, the unapproved scheme may be more tax efficient than normal pay or paying excess contributions into an approved scheme and facing registered scheme excess charges.
Old Rules - For Existing Schemes Set Up Before April 2006
There were two types of scheme available to an employer who wished to provide unapproved benefits for an employee.
These were:
- Funded Unapproved Retirement Benefit Schemes (FURBS)
- Unfunded Unapproved Retirement Benefit Schemes (UURBS).
FURBS - Funded Unapproved Retirement Benefit Schemes
Contributions were paid in by the employer to create a fund. The contributions attracted an income tax charge as a benefit in kind. The employer was allowed to treat any contributions paid as a business expense. For contributions paid after 6 April 1998 there was a liability to pay employers national insurance contributions. The fund itself was taxed on income and capital gains made. Any benefits paid to the employee were free of income tax if they were paid out as a lump sum. There are also FURBS that are invested offshore with the tax treatment being marginally different.
Rules for payments after 2006 into Existing FURBS set up before 2006:
- Employee pays no tax or national insurance
- Employer receives no tax relief on contributions until employee draws a pension
- Investment income in the fund pays tax at 40% (32.5% on share dividends)
- When paid, the employee pays income. They may also have to pay national insurance if
- Death benefits may be subject to Inheritance tax
UURBS - Unfunded Unapproved Retirement Benefit Schemes
Different from FURBS in the fact that they were not funded by contributions from the employer they are merely a promise of increased benefits at retirement. The employer gave a promise, they did not make contributions to set up a fund to provide increased retirement benefits. There was no tax liability on the employee at the time the promise was made but only when the retirement benefit is paid out. When the employee retired, the employer was allowed to offset the money invested to purchase the retirement benefit as a tax deductible expense. The benefit paid to the employee was subject to income tax but not national insurance contributions.
Rules for Existing UURBS after 2006:
The rules are much the same as there are no funds and no employer contributions to tax.
Transitional Tax Relief UURBS and FURBS - Complex Rules
There are also some rather complex rules that affect schemes that were in force and had value (be it funds or unfunded promises) that are quite complex. How the rules affect existing schemes will depend upon whether your scheme was set up before 1 September 2003 or after.
Request Advice:
Unapproved retirement schemes are extremely complex and we strongly suggest you contact us for advice.