There are two main types of pension in the UK: money-purchase and final salary schemes.
Money-purchase schemes include occupational money purchase, personal pensions, stakeholder pensions and executive pension plans. In a money-purchase scheme, the final pension amount will depend on factors like how much cash was paid in; the investment performance of the pension fund; the age at which the fund is used to purchase an annuity; and the level of annuity rates at the time.
Final-salary pension schemes (also known as salary-related or defined benefit schemes) are usually based on an individual's final earnings at or close to the time they leave the company – usually through retirement - and how long they were in the scheme.
As an employer you are not obliged to set up a pension scheme for your employees but, apart from a few exceptions, if your company has five or more employers, you are required by law to provide your employees with access to a stakeholder pension scheme. If you do not want to contribute to your employees’ pension this is probably your best option as the scheme is administered by an outside provider.
Most pension schemes – apart from group personal pension or stakeholder arrangements – operate by way of a trust whereby the trust receives contributions from the employer and employees and pays out members' benefits. The trust's objectives will be outlined in the trust deed, but day to day decisions are taken by the trustees. An employer can be a trustee and at least a third of trustees must be nominated by the scheme members. There are various legal obligations which arise from the relationship between the employee, the trust and the employer. Employers’ duties include:
Although through the scheme’s deed and rules, a formal relationship is formulated between the company and the trustees, it is advisable to have written agreement between the company and trustees which outline the duties of all parties, including service standards, the timetable for the provision of information and for paying contributions.
Employees may contribute up to 100% of their earnings (or up to £3,600 a year if your annual salary is less than this) and get tax relief, although, there is a limit on the amount of tax relief that may be given on contributions and other increases in pension rights each year. This annual allowance has been set at £235,000 for 2008/09, £245,000 for 2009/10 and £255,000 for 2010/11 (the level it will stay at until 2015/16). Employer contributions also usually attract tax relief as they can be set off as business expenses.
From 2012 employers will have to:
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