Defining the benefits

It’s never been the sexiest topic – and few would profess to be experts – but pensions are a central part of working life in the UK. And the past few years have seen some significant shake-ups in the way that UK companies are obliged to deal with employee pensions. There are two main types of pension, defined contribution, and defined benefit.

Defined contribution pension

This creates a pension pot based on how much is paid in and these are usually either personal or stakeholder pensions.

Typically a DC pension will either be workplace pensions arranged by the employer or a private pensions arranged by an individual.

Under the DC model, money paid in by the employer or the saver is put into investments (such as shares) by the pension provider. The value of the pension pot can go up or down depending on how the investments perform. Some schemes can move money into lower-risk investments as the saver gets close to retirement age. Savers may be able to ask for this if it does not happen automatically. Finally, the pension provider usually takes a small percentage as a management fee –

Ultimately, the final amount paid to the pensioner depends on:

• how much was paid in
• how well the investments have done
• how they decide to take the money, for example as regular payments, a lump sum, or smaller sums

Under the current UK tax law, 25% of the pension pot will be tax-free.

Defined benefit (DB) pension schemes

These are usually workplace pensions arranged by the employer. They’re sometimes called ‘final salary’ or ‘career average’ pension schemes. As the UK population ages – and the pensionable age rises – these are becoming much less popular – indeed new DB schemes are rarely opened now.

Under the DB regime, how much the pensioner receives depends on the pension scheme’s rules, not on investments or how much has been paid in. Workplace schemes are usually based on a number of things, for example, average salary and how long an employee has worked for the employer.

Under DB schemes, the pension provider commits to a certain amount each year when the saver chooses to retire.

Pensioners can choose to get 25% tax-free with the rest as regular payments.

For employers, it is now more likely that they will offer a DC scheme. And this is typically run through the auto-enrolment scheme that applies to virtually all employers in the UK. You can find more details on that here. But as a short guide, employers should be asking the following questions in order to make sure they are doing the right thing by their employers:

• Initial assessment: who’s eligible?
• System check: does your software comply with HMRC rules?
• Have you communicated with your people?
• Have you registered with The Pensions Regulator (TPR)
• Have you chosen a compliant provider with the right pension plan?
• Have you set up a triennial employee assessment?
• Are you fully aware of your statutory communications obligation?

Are you ready to enrol newly eligible employees?

• Have you paid the correct contributions to your pension provider?
• Did you complete and file a declaration of compliance?
• Does your team know how to manage opt-ins and opt-outs?
• Are your records up to date?

At Paul Beare Ltd, we can handle the compliance aspects of your pensions auto-enrolment obligations, as well making sure your payroll systems are kept up to date, reflecting your obligations to the employees in the scheme.