Business Pension Planning

Like many individuals, businesses need to plan their finances to ensure that they consider the opportunities available and where appropriate, maximise the opportunities available. 

There are various issues to consider, such as debt control, investment of surplus funds, the protection of directors and key personnel to name a few. This is not an exhaustive list and we will of course need to include pension planning as a key issue.

Whether you are a company, partnership or sole trader, pension planning is an important part of most business’s financial planning. Usually, as a highly tax efficient way of distributing profits, pensions can be used to achieve financial security for both business owners and their staff. Some employers and individuals use their pension fund to purchase commercial property with the objective of the business being a tenant of the pension asset. There are many types of pension scheme available, some with different conditions that can affect the outcome of the eventual benefits. Many will remember the simplification of pension rules in April 2006, sometimes known as Pensions ‘A’ day, which were designed to streamline pensions. Whether this has been successful is a matter for debate, and with the introduction and proposals for new employer pensions in the next few years, the situation may change all over again. I have commented on a few of these points below:

National Employment Savings Trust (NEST)/Stakeholder Pensions

Many business owners are only too aware of the implications and cost of the proposed pension changes in the next few years with ‘Personal Accounts’. The name and some of the details of these arrangements have changed with the introduction of NEST, the National Employment Savings Trust in the last few weeks. This will become highly topical because of its’ cost on the bottom line of employers budgets.

Following the original plans, the Government has announced that the scheme would now be phased in from 2012, with smaller employers joining up over the following few years. The scheme will force both employers and employees to save for their retirement and people will automatically be enrolled, but with the right for employees to opt out. Contributions will be set and required from both parties involved and could have an effect on future budget planning. Many businesses are considering building this potential liability into their business plans to ensure that costs are controlled.

Many employers with over 5 staff members will remember the introduction of Stakeholder pensions in 2001 and the requirement for employers to offer the ability for employees to save for their retirement via an employer’s arrangement (Stakeholder or equivalent). This requirement remains in place and is still a legal requirement. As noted above, the new NEST scheme will take these requirements a stage further, requiring pension contributions based on percentage of salary after 2012.

Do you remember Pensions ‘A’ Day, April 2006

I am sure most remember ‘Pensions ‘A’ Day, introduced from 6th April 2006. This introduced sweeping changes came into force for pensions and the legislation that surrounds them to simplify the many arrangements into one regime. This simplification was designed to improve understanding of how pensions work and increase the flexibility of how they are contributed to, invested in and drawn from. We have detailed some of the changes below:

• Maximum tax free cash to be 25% of the fund when purchasing a lifetime annuity.
• Lifetime pension limit for 2010/2011 is increased to £1.80m per person, now fixed at this level to 2015/2016.
• Increase in the minimum retirement age from 50 to 55 from 2010.

However, since then, we have seen pension rules evolve in line with the changing tax regime and a good example of this is as follows: 

• A higher rate income tax level of 50% will apply to those earning over £150,000, with new restrictions on the ability to offset this tax with pension contributions.
• A reduction in the personal allowance for those earning over £100,000.

The world of pensions and their rules are unlikely to stand still both now and into the future of a new political environment in 2010. This is why it is important that you, both as an individual and as a business review your financial planning with your Financial Adviser on a regular basis.

Final Salary/Defined Benefit Occupational Schemes

Most types of occupational pension scheme have been the topic of debate in recent years. As the name suggests, the benefits to the employee at retirement are defined at outset. These arrangements have proved to be expensive for employers and many companies have moved away from this type of liability because of the financial burden and commitment in future years can be high. Ongoing advice is key to the maintenance of these plans.

Money Purchase/Defined Contribution Occupational Schemes and AVC's

As the contributions (rather than the final benefit) to the scheme are defined, the ongoing liability has proved to be more popular in recent years. The contribution is invested and the employee receives a pension fund to buy retirement benefits rather than a defined income. Benefits for the employee can be improved by the employee making Additional Voluntary Contributions (AVC’s). Some employers have used Small Self Administered Schemes (SSAS) to accrue retirement benefits and these should be reviewed regularly.

Advice can be provided on all types of occupational schemes, such as Small Self Administered schemes (SSAS), Executive Pension Plans (EPPs), Final Salary and Money Purchase arrangements, including AVCs. Some arrangements now also use SIPP (SIPPs) investments as an alternative.