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A Guide to Operating a Pension Plan for Small Businesses

Small business owners have a lot of things competing for their time and attention. As a business owner yourself, you know how important it is to get all of your administrative obligations out of the way so that you are free to concentrate on your customers and the products or services you offer. Having the headaches of dealing with employee pensions hanging over your business only prevents you from doing what you need to do.

What you must understand is that pension law has changed. Between now and 2018, every employer in the UK will be obligated to establish some sort of pension plan for qualified employees under auto-enrolment rules. Furthermore, employers will be required to make contributions on behalf of all eligible employees. You need to know how the new pension rules apply to you so that you can take care of business sooner rather than later.

The place to start is understanding whether or not you are required to establish a workplace pension. Although there are some limited exceptions, the best way to understand your obligations is as follows: if you employ just a single worker you must establish a pension scheme on behalf of that worker, even if that worker does not yet qualify for auto-enrolment or that worker decides to opt out of your plan.

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Where it gets tricky is determining the status of an employee. For example, if you are an independent contractor operating as a sole proprietor you may not qualify as an employee. However, if you have established a limited company, then you are considered a director of your company by law. As a director, you are also an employee. Therefore, some kind of pension scheme will have to be put in place.

Already Existing Pension Plans

Your small business may already have an established pension plan separate from auto-enrolment rules. But here's a question: does that plan qualify for auto-enrolment? Some do, others do not. It is incumbent upon the business owner and/or its directors to determine auto-enrolment eligibility and, in cases where a plan does not meet minimum requirements, establish a new plan that does.

The Pensions Regulator provides a very helpful tool on its website that makes it easy to determine whether or not your existing plan qualifies under auto-enrolment regulations. Just by answering a few simple questions you will know right away if your current scheme qualifies or you need to set up something else.

Be advised that the necessity to establish a new pension for your workers will be subject to your company's staging date. Staging dates began in 2012 and run through until the end of 2018. If you don't know the staging date for your company, you can find that information as well on the Pensions Regulator's website. Failure to establish a qualifying pension scheme on or before your staging date could result in a minimum £400 fine, plus additional daily fines based on the number of workers affected.

Your Pension Scheme Options

Finding a good pension plan for small businesses is not necessarily an easy task. Small businesses have fewer resources to dedicate to pensions, whether those resources are time, money, research, or any combination thereof. Yet it still pays to investigate all of your options before settling on a pension scheme.

We have done some preliminary research and put together a short list of a few options just to give you an idea of what is out there. Bear in mind that much of your decision will be based on how your company is structured and the number of employees you have.

  • NEST Program – The government's NEST pension programme was specifically established to help businesses that could not otherwise afford to set up a workplace pension. It is a low-cost, defined contribution scheme that both small businesses and sole proprietors can enrol in. Enrolment is fast, easy, and can be completed online. Most importantly, it is absolutely free to set up and offers comparatively low maintenance fees.
  • FSB Pension – The Federation of Small Business is a leading UK business organisation offering a long list of benefits to members, including a low-cost pension scheme that includes administration software, advice on setting up and maintaining your pension, and flexible transfer options for your employees.
  • SSAS – The small, self-administered pension scheme is a type of pension usually established for the purposes of meeting the requirements of company directors and senior management. Because they are typically limited to 12 members, they are impractical for anything other than this purpose. The SSAS is often the best option for the self-employed worker who has established a limited company.
  • SIPP – Because most self-employed people operating independently of limited companies are not considered workers according to tax law, their pension options are few. They can still use the NEST programme or establish a self-invested personal pension (SIPP).
  • Stakeholder Pension – In some cases, though they are rare, a self-employed individual can satisfy pension regulations by investing in stakeholder pension. It would be important to consult with a financial advisor before going this route in order to avoid running afoul of the law.

As you can see, there are quite a few options for small business owners. Perhaps the most attractive option for those with between 25 and 200 employees is the NEST scheme. NEST pensions qualify under auto-enrolment, making them an easy programme to establish in time to comply with a business’s staging date. All of the information you need to set up a NEST pension can be found on the NEST website.

Making Pension Contributions

Auto-enrolment regulations require employers to contribute it least some funds to their workers' pension pots. The total amount of contributions into any one scheme are determined by the rules of the scheme itself. However, there are minimum contribution amounts stipulated by the regulations.

Employer contributions have thus far been determined according to staging dates. All companies establishing a pension plan prior to September 2017 must contribute a minimum of 1% of a worker's salary to the pension scheme; the worker also contributes 1%. Both parties can contribute more as allowed by the scheme's rules.

Between October 2017 and September 2018, the contributions increase to 2% and 3% respectively. From October 2018, minimum contributions will be 3% and 5%. If you own a small business with a staging date of September 2018, you will effectively begin at the highest contribution threshold while everyone else enrolling before you are graduated to that threshold from October 1.

There are a few exceptions to the mandatory employer contributions rule:

  1. An employer does not have to contribute when an employee specifically chooses to opt out of the company's workplace pension scheme.
  2. An employer does not have to contribute in cases where a worker chooses to establish a stakeholder pension or SIPP. However, the employer can voluntary contribute to both kinds of pensions if they so choose.
  3. An employer does not have to contribute to any worker who is ineligible for auto-enrolment AND opting in.

The last exception needs further explanation. Under the rules, you may have employees that are not eligible for auto-enrolment due to the amount of money they earn. However, some of these employees will still have the legal right to opt into your workplace pension scheme. In such cases, you are obligated to make contributions accordingly.

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You may have a third set of workers that is not eligible under either rule. You may still allow them to participate in your pension plan, but you would be under no obligation to contribute to it. These workers are typically low-wage earners who only work part-time.

The pension laws in the UK have changed dramatically thanks to legislation passed in 2008. It is incumbent upon all small business owners to find out how the rules apply to them. If you need a pension plan for small businesses, do not continue to put it off. You may be putting your company in jeopardy by not complying with auto-enrolment rules.

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