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 schemes
Also 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:
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 schemes
These 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.