Company Pension Schemes

1. The Options

A single tax regime for pensions introduced in April 2006, replaces the eight previously in force. This may stimulate the development of new types of pensions but for now the old legal framework for the differing types of schemes still applies.

1.1 Money purchase schemes (or 'defined contribution' schemes) have become popular with employers, as they involve a predictable financial commitment.

• There is no guarantee about the size of the pension payments you will receive.The pension is based on the money paid in, the growth in your pension funds and annuity rates at the time of retirement.
• Most pensions from money purchase schemes are restricted to two thirds of final salary and the tax-free lump sum will from now on normally be limited to 25 per cent of the total fund.
• When the employee retires (or after retirement, if the scheme's rules allow), the scheme's trustees must provide an annuity. This provides the member with pension payments for the rest of his or her life.

1.2 Group personal pensions (GPPs) provide an alternative for small and medium-sized businesses which want to offer pensions to attract and retain good employees, but are daunted by the Pensions Act.

• An individual pension plan is set up for each employee who joins. Both employer and employee can contribute to the plan.
• The pension paid on retirement depends on the level of contributions paid, the fund's investment performance, policy charges and annuity rates at retirement.
• Charges to employees are often lower than those under individual pension plans.
• Most of the administration and disclosure is handled by the pension provider.

1.3 If some employees do not qualify for membership of your existing company scheme, or if you do not offer a scheme at all, you may have to offer access to a stakeholder pension at the workplace.

• Stakeholder pensions are designed to be simple, secure, low-cost arrangements.
• You have to designate a scheme and pass details of it on to your employees.
• If asked by employees who have joined your designated scheme, you have to deduct employee's contributions from pay.
• You do not have to contribute to stakeholder pensions, but may do so.
• You cannot be held responsible for the performance of the scheme.
• Employers with fewer than five employees, or whose employees all earn less than the lower earnings limit (£90 a week), need not offer stakeholder pensions.

1.4 Final salary schemes (or 'defined benefit' schemes) have largely been replaced by money purchase schemes for new employees, as running final salary schemes has become very expensive for employers.

• Pensions are based on the final salary at (or near) retirement, and on how long the employee has been in the scheme.
• Pension payments are financed from the pension 'fund', normally created from employer and employee contributions.
• If the scheme's investments under perform, the employer will usually have to make increased contributions.

1.5 Hybrid schemes provide a mixture of final salary and money purchase benefits.