Business Pension Planning

Whether you are a company or partnership, pension planning is an important part of most businesses financial planning. As a highly tax efficient way of distributing profits, pensions can be used to achieve financial security for both business owners and their staff. There are many types of scheme available, each with different tax regimes. We have detailed these further below to provide a flavour and to detail some of the changes that occurred at pensions 'A' day (April 2006).

• National Employment Savings Trust (NEST)/Stakeholder Pensions
• Pensions ‘A’ Day, April 2006
• Final Salary/Defined Benefit Occupational Schemes
• Money Purchase/Defined Contribution Occupational Schemes and AVC’s

National Employment Savings Trust (NEST)/Stakeholder Pensions

Many business owners are only too aware of the implications and cost 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 three 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 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 employers arrangement (Stakeholder or equivalent). This requirement remains in place and is still a legal requirement. The new NEST scheme will take these requirements a stage further, requiring pension contributions based on percentage of salary after 2012.

Pensions ‘A’ Day, April 2006

From 6th April 2006, sweeping changes came in for pensions and the legislation that surrounds them to simplify the many arrangements into one regime. This will be called pensions ‘A’ Day. This simplification is 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 2009/2010 is £1.75m per person.
• Tax relief on pension contributions to 100% of earnings, up to £245,000 per annum (2009/2010).
• Increase in the minimum retirement age from 50 to 55 from 2010.
• A higher rate tax level of 50% will apply to those earning over £150,000 for the new tax year 2010/2011.

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.