Experts Guide to Company Pension Schemes
Workplace pensions, also known as company pension schemes, have long been the preferred method for saving for retirement. For generations, people have put money into these pension schemes during their working careers, then converted pension funds into annuities at retirement. Moreover, while some things have remained the same over the years, there have been quite a few changes in recent years due to pension reform. It is more important than ever before for workers to understand company pension schemes and how these work.
The first thing to understand is that the company pension is distinct and separate from the state pension. Even though you might pay into National Insurance toward your eventual state pension, your employer may also offer an additional company pension into which you can contribute. Doing so is a good idea. Why? Because the state pension is not going to provide enough income to pay your bills during retirement.
Thanks to auto-enrolment, most workers in the UK will be involved in company pension schemes by 2018. You can opt out of your employer's plan if you believe there are more attractive options elsewhere. We encourage you to be careful of opting out without an alternative form of retirement saving.
Rules for Auto-Enrolment
Auto-enrolment was implemented by the government in 2012 as a means of ensuring as many workers as possible were saving for retirement. Every company with at least one staff member, above and beyond directors, has some legal obligations relating to the programme. The largest companies began implementing auto-enrolment in 2012; the smallest companies will not be required to comply until 2018.
The most important thing for employers to know is their staging date. This date is the date they are required to begin complying with auto-enrolment rules. Who is eligible for auto-enrolment? The rules apply as follows:
- Any worker over the age of 22 and earning at least £833 monthly must be automatically enrolled in a workplace pension. The employer must contribute to that pension as well. Workers can opt out if they choose.
- All workers earning at least £833 per month, and under 22 or over the state pension age, have the right to opt in to a workplace pension offered by an employer. If they opt in, employer contributions are required.
- Workers of all ages earning between £486 and £833 per month also have the right to opt in to a workplace pension that includes employer contributions.
- Workers of all ages earning less than £486 monthly have the right to enrol in a workplace pension; employer contributions are not required.
If your employer has already reached its staging date, you should have received some form of notice regarding auto-enrolment. If you have not yet received such notice, check with your employer to be sure you have not been simply overlooked. The employer is required to furnish you with all the necessary information needed to make a decision about pension investing in the company plan.
NEST Company Pension Schemes
When the government developed the auto-enrolment programme, it understood that some small employers would struggle to comply due to the financial obligations related to pensions. The issue was addressed by developing the NEST programme. This programme provides low-cost company pension schemes backed by the government and made available to smaller employers and the self-employed.
The government expects a fair number of small and mid-size companies to choose NEST pensions rather than working with traditional pension providers. NEST is very attractive to employers because it offers:
- low charges
- flexible contributions
- easy set-up and administration.
Employers also appreciate that NEST company pension schemes are defined contribution pensions by default. What is a defined contribution pension? It is a pension with a payout based solely on the contributions made and the performance of the investments in the fund. Simply put, if you contribute £100,000 to a defined contribution pension scheme, you will be paid that same amount of money plus any additional earnings produced by the fund. If your fund lost money, which is always a possibility, your earnings could be less than the amount you contributed.
Defined contribution pension schemes are more affordable to employers than their defined benefit counterparts are. A defined benefit pension is one that guarantees a certain level of retirement income regardless of how well investments perform. These pensions are often called final salary schemes because income is typically tied to the final salary an individual was earning at retirement. Defined benefit pension schemes are very costly to employers and, as such, are quickly fading away in the UK.
Establishing Company Pension Schemes
Employers and their employees have different responsibilities in terms of establishing company pension schemes. Employees have it easier in that they only have to fill out the appropriate paperwork and submit it to the relevant department. Contributions are automatically deducted from pay; the worker chooses investment options on an annual basis. Things are more complicated for the employer.
To begin with, the employer must determine what kind of pension scheme it wants to offer employees. Company pension schemes are usually provided by legally established trusts or certified pension administrators such as banks and insurance companies. Neither option is necessarily better than the other is in a broad sense, but the details of each pension scheme a company is looking at may indicate some advantages or disadvantages.
The step-by-step process for establishing a company pension is as follows:
- Investigate various options in order to find a list of pension schemes that can be used for auto-enrolment.
- Determine how much your company can afford to spend on contributions.
- Determine how much income you want your pension scheme to return to employees.
- Determine any specific investment opportunities you want to invest in or avoid altogether.
- Research all of your options thoroughly; ask plenty of questions along the way.
- Choose your pension provider and begin the process of establishing your scheme.
- Inform your employees once the scheme is established, opening enrolment as necessary.
Researching your company pension scheme options is the most important step in the entire process. Suffice to say that not every workplace pension scheme is advantageous to you as an employer. You need to know the following:
- Fees and Charges – Every pension scheme involves fees and charges assessed to both employers and workers. The idea is to guarantee maximum value by comparing fees and charges with earnings and other benefits.
- Future Legislation – Employers need to know if their chosen pension scheme allows them to comply with future legislation in a way that is manageable and scalable. An inflexible scheme is one that could end up being useless when changes are made at any time in the future.
- Specific Rules – Pension providers have a certain amount of freedom in establishing the rules of their schemes. You need to know of any special rules, such as those that might affect what happens to pension funds when a worker dies.
- Provider History – Knowing the history of the pension provider can tell you a lot about what to expect in the future. A provider with a good reputation is likely more trustworthy than another with a questionable reputation. Do not ignore the past problems of any provider you are considering working with.
Company pension schemes are important to both employers and employees. They are excellent tools for employees looking to recruit, hire, and retain the best talent in their respective industries. They are important to workers in that they provide a means of saving for retirement. You owe it to yourself to learn everything you can about company pensions and how they affect you and/or your business.
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