Why it is Important to Have a Pension Plan in Place if you are a Small Business Owner

When the Pensions Act of 2008 came into force, it contained provisions for subsequent changes to the UK’s pension system which are likely to have significant implications for small- and medium sized enterprises. The basic idea behind the new provisions is to encourage as many people as possible to lay financial foundations for their retirement above and beyond the statutory state pension: people are living longer, and funding a comfortable retirement will require savings now, not tomorrow.

The reforms are due to come into effect in 2012, and some groups such as the Association of Chartered Certified Accountants (ACCA) immediately raised concerns that small businesses would be adversely affected by increased costs and administration. Others, such as the Federation of Small Businesses (FSB), have argued that the reforms, which require employers to automatically enrol all staff into a pensions scheme, should not affect sole traders and individual freelancers who work through their own limited companies. The FSB believes that these ‘micro firms’ may be exempt from the 2012 reforms.

Nevertheless, it’s as well to assume that if you employ other people in your company, you’ll be required to enrol all eligible staff into a qualifying pension scheme and to make employer contributions to it from 2012. It’s as well to have a little foreknowledge about the kinds of pension schemes which are suited to small businesses in particular.

If you employ more than five people who are over the age of 18 and who earn above the National Insurance lower earnings limit (presently £90 per week), you’re obliged by law to arrange access to a stakeholder pension scheme for them. These are low cost schemes with a minimum amount to pay of as little as £20 per month. To qualify, employees must have worked for you for at least three consecutive months, and you can choose which stakeholder scheme from a wide range of banks, financial services providers and pension providers. It’s advisable to check that the scheme is registered with the Pensions Regulator, that you’ve selected it from a reputable and well-established pensions provider, and that it’s open to all employees (some are limited to certain trades). The relationship in a stakeholder pension is between the employee and the pension provider. Your role is limited to providing reasonable access to scheme promoters at your premises, arranging for employee deductions to be made through bankroll and funding your employer contributions (if indeed there are any).

If you decide to opt instead for an employer contribution scheme, you may well be entitled to significant tax relief if the scheme is registered with HM Revenue and Customs. Employer contribution schemes take several forms. Final-salary schemes are based on the employee’s final salary (as well as the length of time he or she has made contributions). These tend to be offered by larger companies because employers may be required to make additional top-up payments if the funding falls short of the required amount. Pensions paid from money-purchase schemes are determined by the value of the savings at retirement age. Employers usually contribute 5.8 per cent of basic salary, but if the scheme underperforms, the risk lies with the employee, not the employer.

There are numerous schemes available, and it’s advisable to take advice and guidance from reputable experts such as the Pensions Advisory Scheme, the Society of Pensions Consultants, and the Association of Independent Financial Advisers.