Tax and legal matters
Setting up a pension fund trust is a condition of HM Revenue & Customs approval, and approval means eligibility for significant tax breaks. Such favourable treatment makes employee contributions tax exempt.
Taxpayers on the basic tax rate of 20% will also have £100 invested for every £80 they pay into a pension. Higher-rate taxpayers benefit even more and income and capital gains generated within the pension fund also qualify for tax relief.
Employers get tax breaks from approved pension schemes too because costs - including contributions and expenses - can be set off against corporation tax.
Unlike any other benefit, pension fund contributions are exempt from benefit-in-kind tax: the investment, income and capital gains of the scheme are mostly exempt from tax; only the final pension paid is taxable.
There is no longer any limit on the amount that may be contributed to a registered pension scheme but there is a limit on the amount of tax relief that can be given on contributions.
Pension 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 members’ 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.
Employers have to ensure that pension contributions are paid on time and that the money is handled properly. Employees' contributions have to be paid within 19 days of the end of the month in which they were deducted from pay and missing this deadline can have serious repercussions: trustees have to report this to the Pensions Regulator and as the employer you may be liable to a fine.
Employers also have to differentiate between the assets of the business and the assets of the pension fund, and take every precaution to ensure that the assets of the pension fund are never used within the business.
You must ensure that there is adequate information and consultation with employees and consult with employees if you decide to increase the pension age, close the scheme to new members or stop employer contributions for instance. This is now a legal requirement.
Employers must also assist the trustees of final-salary schemes in communicating with members and there is a legal responsibility to give employee trustees adequate paid time off to do the job and for training purposes.
If you are offering a group personal pension or stakeholder arrangement, where there are no trustees, you might also need to get involved in consulting and communicating with members on wider issues, eg when there are going to be changes to eligibility requirements or employer contributions.
You have a legal responsibility too, to inform the Pensions Regulator when things go wrong, whether the problem is yours or that of the trustees.
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.
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.
Companies are not be obliged by law to have a pension scheme in place but they have to ensure that, as a bare minimum, employees can make contributions to an external, stakeholder pension through the company payroll system.
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
The Pensions Regulator. Tel: 0870 6063636
The Occupational Pensions Advisory Service. Tel: 020 7233 8080