Table of contents
Know your legal obligations on pensions 2
Introduction 2
Final-salary pension schemes 2
Money-purchase p...
Subjects covered in this guide
Introduction
Final-salary pension schemes
Money-purchase pension schemes
Stakeholder pensio...
Final-salary pension schemes are usually
based on an individual's final earnings at or
near retirement - or when they leav...
their employees. Both employers and
employees can make payments into such a
scheme. However, payments into an
occupational...
they were deducted.
The responsibility for registering the pension
scheme rests with the pension provider.
This informatio...
your employees
• formally choose a scheme as the one
to which you will give workers access
• give contact details to the w...
Regulator website (PDF, 36K) - Opens in
a new window.
There are some exceptions to the
requirement to consult. From 6 Apri...
Additional Voluntary Contributions
Following reform of the tax regime on
pensions, employers are no longer required
to off...
National Insurance: Contracted Out
Pensions Helpline
0845 915 0150
HMRC Pension Schemes Services
Helpline
0845 600 2622
Fi...
Download the guide for employers on
promoting pensions to employees from
the FSA website (PDF, 165K) - Opens in a
new wind...
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Know Your Legal Obligations On Pensions

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It is sensible for everybody to make sure that they have some sort of pension provision. As an employer, you need to understand your legal obligations in this area.

You should consider your own retirement needs as well and, even if you own the business, do not rely on selling your company as a guaranteed source of income on your retirement.

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Know Your Legal Obligations On Pensions

  1. 1. Table of contents Know your legal obligations on pensions 2 Introduction 2 Final-salary pension schemes 2 Money-purchase pension schemes 3 Stakeholder pensions 5 Promoting stakeholder and group personal pensions to employees 6 Keeping employees informed 6 Contracting out of the State Second Pension 7 Pensions reforms 8 Helplines 8 Related guides on businesslink.gov.uk 9 Related web sites you might find useful 9 Know your legal obligations on pensions Created by Business Link on 17 September 2009 09:42 You can personalise content from the Business Link website and download it in PDF format. This is a free service Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 1
  2. 2. Subjects covered in this guide Introduction Final-salary pension schemes Money-purchase pension schemes Stakeholder pensions Promoting stakeholder and group personal pensions to employees Keeping employees informed Contracting out of the State Second Pension Pensions reforms Helplines Related guides on businesslink.gov.uk Related web sites you might find useful You can find this guide by navigating to: Home > Employing people > Pension schemes > Know your legal obligations on pensions Introduction It is sensible for everybody to make sure that they have some sort of pension provision. As an employer, you need to understand your legal obligations in this area. You should consider your own retirement needs as well and, even if you own the business, do not rely on selling your company as a guaranteed source of income on your retirement. As an employer you are currently not obliged to set up a pension scheme, but - depending on your size and your existing provision - you might be obliged to provide access to one run by a third party. However, the Pensions Act 2008 will introduce new obligations on employers to provide access to, and contribute towards, a workplace pension scheme for eligible employees. The two main types of private pension are final-salary and money-purchase schemes. Money-purchase schemes include occupational money purchase, personal pensions, stakeholder pensions and executive pension plans. Whichever pension you choose, either for yourself or on your employees' behalf, you need to understand the relevant regulations and tax implications. Talk to a professional adviser about your particular needs before deciding. This guide will help you understand your options and explain your legal obligations. Final-salary pension schemes Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 2
  3. 3. Final-salary pension schemes are usually based on an individual's final earnings at or near retirement - or when they leave the company if this is before retirement - and how long they were in the scheme. These are also known as salary-related or defined benefit schemes. See our guide: choose the right pension scheme. Salary-related schemes generally operate by way of a trust that receives contributions from the employer and employees and pays out members' benefits. The trust's objectives will be set out in the trust deed, but the day-to-day decisions will be taken by the trustees. There is a network of legal obligations governing the relationship between the employee, the trust and the employer: • the employer is bound, like the employee, by the legal obligations created by the contract of employment - for example, on the payment of pension contribution, if any • all trustees, including those nominated by the employer, must act in the interests of all the scheme's beneficiaries - which includes scheme members, but may in some rare situations also include the sponsoring employer rather than those of the company • the employer has a duty to notify the Pensions Regulator if there is any reason to think that any problems or wrongdoing are occurring in the scheme and that the wrongdoing is important to the Pensions Regulator • the employer is responsible for ensuring that any employee contributions deducted from pay reach the pension scheme within 19 days of the end of the month in which they were deducted, and that the employer contribution (if any) arrives when it is due • the employer must ensure that the assets of the pension fund are kept totally separate from those of the business • the employer must ensure that employees are informed and consulted on developments that affect the pension fund • trustees must be assisted in the performance of their duties - employee trustees must be given paid time off to undertake those duties and any necessary training Find out how to meet the requirements for trustee knowledge and understanding using the toolkit on the Pensions Regulator website (registration required) - Opens in a new window. Money-purchase pension schemes In a money-purchase scheme (also known as a defined contribution scheme), the final pension amount will depend on: • the amount of money paid in • the investment performance of the pension fund • the age at which the fund is used to purchase an annuity - the later this is, the higher the annuity payments are likely to be • the level of annuity rates at the time • the ancillary benefits offered - such as spouses' pensions, or annual increases in pensions paid, if any Some employers now provide occupational money-purchase pension schemes for Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 3
  4. 4. their employees. Both employers and employees can make payments into such a scheme. However, payments into an occupational money-purchase scheme cease once the employee leaves. With an occupational money-purchase scheme the investment risk moves from the employer - as in final-salary schemes - to the employee. The pension will not necessarily be lower, but the risk that the employer will have to find substantial extra sums of money to fund the scheme because of poor investment performance is eliminated. Occupational money-purchase schemes generally operate by way of a trust. Objectives are set out in the trust deed and day-to-day decisions will be taken by the trustees. Employers still have some key responsibilities, either as employers or as trustees - for example, on the level of employer contribution, or the extent of provision for dependants. A provision of money-purchase schemes is that they offer their members the Open Market Option whereby members may transfer funds at retirement to draw an immediate annuity with another provider. Members of a money-purchase scheme approaching retirement will need timely information on this option and other retirement income options, such as alternatively secured pension schemes. Read information on the open market option on the Pensions Regulator website - Opens in a new window. Employees can also make regular payments to provide for retirement by way of individual personal pension schemes. These are money-purchase schemes, with the risk of poor investment performance being carried by the employee. In some cases, employers will make payments into these schemes for the benefit of their employees as long as they are with the business. Some employers may also arrange for a pension provider to set up a group personal pension (GPP) arrangement for their employees. In a GPP, employees contribute to individual personal pensions which are then grouped together and managed as a group by the pension provider, to reduce costs. The employer may often pay the administration costs of running a GPP. Employees may contribute up to 100 per cent of their earnings (although up to £3,600 a year can be contributed even if an employee's earnings are less than this amount) and get tax relief. However, there is a ceiling on the amount of tax relief that may be given on contributions to any registered pension scheme and other increases in pension rights each year. This annual allowance has been set at £245,000 for 2009-10 and £255,000 for 2010-11 where it will remain for each year until 2015-16. Employer contributions also generally qualify for tax relief as they can be set off as expenses, although employers should seek professional advice to make sure their contributions qualify as true business expenses. See our guide: choose the right pension scheme. Most decisions in respect of personal pensions are taken by individual pension holders and the pension managers (the 'pension providers'), or the specialists they commission, eg investment specialists. However, employers are still legally obliged to ensure that employee contributions deducted from wages reach the fund within 19 days of the end of the month in which Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 4
  5. 5. they were deducted. The responsibility for registering the pension scheme rests with the pension provider. This information must also be provided to employees - see the page in this guide on keeping employees informed. You can get guidance on personal pensions at the Pensions Advisory Service website - Opens in a new window. You can read about your pension obligations as an employer at the Pension Service website - Opens in a new window. Stakeholder pensions Stakeholder pensions are flexible money-purchase arrangements targeted at individuals on moderate incomes. They are available from financial services companies such as banks, building societies and investment companies. See our guide: choose the right pension scheme. If you have five or more relevant employees on your payroll, and do not provide another qualifying scheme, you are obliged to provide your employees with access to a stakeholder pension. Qualifying schemes are occupational schemes that are open to all employees within one year of starting work for you, or personal pension schemes which all employees - except those under 18 - can join, and to which you contribute at least 3 per cent of each member's basic salary. It must also be possible for them to have their contributions deducted from their pay. Contributions can be less than £20 and should not be reduced due to transfer costs. You don't need to provide access to a stakeholder pension scheme for some employees. These are known as 'non-relevant' employees and include: • those who have been in continuous employment with you for less than three months in a row • those who are already members of your existing pension scheme, and those who could have joined it but decided not to • those who cannot join your existing scheme because they are under 18, or because they are within five years of the scheme's normal pensionable age • those who earn less than the National Insurance lower earnings limit for one or more weeks within the last three months • those who cannot join because of HM Revenue & Customs restrictions (for example, the employee does not normally live in the UK) If you have five or more employees and some of them fall in the categories outlined above, you are still required to designate a stakeholder pension scheme. You are only exempted from this requirement if all of them fall within the above categories. You can give your employees access to a stakeholder pension even if you are not required to do so. If you are required to offer a stakeholder pension, you should: • select a scheme from the Pension Regulator's list of registered stakeholder providers • discuss the proposed choice with Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 5
  6. 6. your employees • formally choose a scheme as the one to which you will give workers access • give contact details to the workforce • allow the designated provider access to your employees at your workplace • make payroll deductions for employees who want to pay into the scheme, and keep a record of them • forward contributions to the stakeholder provider Promoting stakeholder and group personal pensions to employees As an employer you may be thinking of offering, or have already offered, your employees a stakeholder or group personal pension scheme. You may want to promote your scheme to them, or find that they look to you for help. But as financial services are regulated, you may be unsure about what you can do. The Financial Services Authority (FSA) regulates financial services in the UK. It offers a guide that tells you what you can do to promote your stakeholder or group personal pension scheme to your employees. It also tells you how you can give them further help or advice without needing to be authorised. Download the FSA guide for employers on promoting pensions to employees from the FSA website (PDF, 165K) - Opens in a new window. The FSA guide only covers stakeholder pension schemes and group personal pension schemes. It does not cover occupational pension schemes. Keeping employees informed Employers now have a duty to inform and consult employees about significant changes in any occupational scheme they offer, or personal pension schemes to which they contribute, by a direct payment arrangement on behalf of their staff. For occupational schemes, the changes in question include: • increasing the pension age • closing the scheme to new members • closing the scheme to existing members • removing liability for employer contributions • introducing member contributions • reducing employer contributions to money-purchase schemes • changing to money-purchase benefits • changing the method of determining the rate of future accrual For personal pension schemes they include: • ceasing employer contributions • reducing employer contributions • increasing employee contributions Information has to be provided to affected members and/or their representatives in writing before the changes start. It must describe the changes and their effect on members, be accompanied by relevant background information and indicate the timescale. At least 60 days must be allowed for consultation before the decision to make the change is made. Consultation must be conducted with a view to co-operation. Download guidance on the employer's duty to consult members on pension scheme changes from the Pensions Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 6
  7. 7. Regulator website (PDF, 36K) - Opens in a new window. There are some exceptions to the requirement to consult. From 6 April 2008 the requirement applies to employers with 50 or more employees. See our guide on how to inform and consult your employees. It does not apply to public service schemes, small occupational schemes (ie schemes with fewer than 12 members who are all trustees of their scheme), occupational schemes where there are fewer than two members, or where the scheme has not registered with HM Revenue & Customs. If you are consulting with employee representatives, you must give them paid time to undertake their duties and may not subject them to dismissal or any other detriment - otherwise they can take you to an employment tribunal. Contracting out of the State Second Pension Providing that a company pension scheme meets certain conditions, it can be used to contract employees out of the State Second Pension. Employees who join a scheme that is contracted out will automatically be contracted out of the State Second Pension. Employers providing such contracted-out schemes pay a lower rate of National Insurance Contributions (NICs) for those employees who join their schemes, and employees themselves also pay reduced-rate contributions. If the scheme is contracted out on a money purchase basis, HM Revenue & Customs (HMRC) will also pay an additional rebate direct to the scheme for investment on behalf of the employee. This is to compensate for the State Second Pension given up by the employee. Where an employee contracts out of the State Second Pension with a stakeholder or personal pension plan, both the employer and employee continue to pay NICs at the full rate. At the end of each tax year, HMRC pays a rebate of NICs plus tax relief on the employee's share of the rebate directly into the pension fund for investment on behalf of the employee. There is no guarantee that the contracted-out pension will be as good as or better than the State pension given up, so some employers have recently been automatically contracting-in employees, with an opt-out clause for those who are determined to obtain the rebate. Since 2002, employees who contribute to a contracted-out occupational, personal or stakeholder scheme may get some State Second Pension for the year in which they contribute. This is because of more generous State benefits for lower-income earners and is intended to prevent them being put at a disadvantage when they contract out. The Pensions Act, which became law in July 2007, means that from a date expected to be 2012, contracting out into a private pension scheme on a defined contribution basis will no longer be allowed. Download contracted-out pensions information from the Pensions Service website (PDF, 327K) - Opens in a new window. Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 7
  8. 8. Additional Voluntary Contributions Following reform of the tax regime on pensions, employers are no longer required to offer Additional Voluntary Contributions to employees who want to improve their pension provision, though some may continue to do so on a voluntary basis. See our guide on running a pension scheme. Pensions reforms It is estimated that around seven million people are not saving enough to deliver the pension income they are likely to want, or expect, in retirement. Currently, employers are not legally required to provide a workplace pension arrangement to their workers - though many are required to provide eligible workers with access to a stakeholder pension scheme. In order to encourage more workers to make adequate provision for their retirement, the government is introducing workplace pension reforms, which are expected to come into force from 2012. The Pensions Act 2008 requires that all employers will have to provide eligible workers with a qualifying workplace pension arrangement and contribute to that arrangement. All eligible workers will be automatically enrolled into this workplace arrangement, which can be either a scheme operated by their employer or the personal accounts scheme. Automatic enrolment means that workers will have to actively opt out if they do not wish to join the workplace arrangement. Employers will be able to choose whether to carry out their duty using the personal accounts scheme or another qualifying workplace pension arrangement. The Pensions Act 2008 also requires that employers will have to make a minimum 3 per cent contribution (on a band of earnings) to their eligible workers' pensions. This will supplement the minimum 4 per cent contribution from the worker and the approximately 1 per cent contribution (in the form of tax relief) from the government. There will be an annual contributions limit into the personal accounts scheme of £3,600. Read information on the Pensions Act 2008 on the Pensions Regulator website - Opens in a new window. Helplines Business Link Helpline 0845 600 9 006 PAS Helpline 0845 601 2923 Pensions Regulator Customer Support 0870 606 3636 National Association of Pension Funds 020 7808 1300 Association of Consulting Actuaries 020 7382 4594 Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 8
  9. 9. National Insurance: Contracted Out Pensions Helpline 0845 915 0150 HMRC Pension Schemes Services Helpline 0845 600 2622 Financial Services Authority Helpline 0845 606 1234 HMRC National Insurance Enquiry Line 0845 302 1479 HMRC Employer Helpline 08457 143 143 HMRC New Employer Helpline 0845 60 70 143 Related guides on businesslink.gov.uk Running a pension scheme | Choose the right pension scheme | Manage your personal list of starting-up tasks with our Business start-up organiser | Inform and consult your employees | Related web sites you might find useful Download pensions information from the Pensions Service website (PDF, 519K) - Opens in a new window Read about occupational pensions at the Pensions Advisory Service website - Opens in a new window Read about your pension obligations as an employer at the Pension Service website - Opens in a new window Find out how to meet the requirements for trustee knowledge and understanding using the toolkit on the Pensions Regulator website (registration required) - Opens in a new window Find out about the tax rules on occupational pensions at the HM Revenue & Customs website - Opens in a new window Read about personal pensions at the Pensions Advisory Service website - Opens in a new window Access the stakeholder pension decision tree at the Pensions Regulator website - Opens in a new window See the register of stakeholder pension schemes at the Pensions Regulator website - Opens in a new window Read information on stakeholder pensions at the Pensions Advisory Service website - Opens in a new window Read "Stakeholder pensions - a guide for employers" PDF - Opens in a new window Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 9
  10. 10. Download the guide for employers on promoting pensions to employees from the FSA website (PDF, 165K) - Opens in a new window Pensions guidance for employers on the Pensions Service website - Opens in a new window Download guidance on the employer's duty to consult members on pension scheme changes from the Pensions Regulator website (PDF, 36K) - Opens in a new window Download contracted-out pensions information from the Pensions Service website (PDF, 327K) - Opens in a new window Pensions Act 2008 overview on the Pensions Regulator website - Opens in a new window Personal accounts introduction on the Pensions Advisory Service website - Opens in a new window Employer duties under the Pensions Act 2008 on the Pensions Advisory Service website - Opens in a new window Know your legal obligations on pensions Know your legal obligations on pensions | Created by Business Link on 17 September 2009 09:42 è Crown copyright 2007 Page 10

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