Pensions: A Guide For Business Founders And Employers

Pensions: The Basic Facts

In very simple terms, a pension scheme is a type of savings plan, which helps individuals save money for later in life when they finish work and no longer have a regular income. Pension schemes are given favourable tax treatment to employees in comparison to other types of savings plans in order to encourage them to save for their retirement.

The current state pension age is 65, although the current state policy is to make the UK state pension 66 by October 2020.

The current law provides for further increases to age 67 by April 2028, and an increase to age 68 no later than 2046. Pension policy changes very frequently, so it is essential for employers to stay up to date on the legislation in regards to pensions.

Types Of Pension Schemes

You and your employees can fund retirement in the following ways:

State Pensions

The basic State Pension is a government-funded pension which entitles any UK taxpayer who reaches retirement age  and has paid National Insurance for a certain number of years during their working life to a weekly contribution to their living costs. The full State Pension is £155.65 per week but the amount an individual will receive depends on their National Insurance contributions. Some retired individuals may be entitled to an Additional State Pension where they have delayed taking the State pension or have over a certain amount of National Insurance contributions.

Private Pensions

Private pensions broadly fall into two types of pension, and there are various different pension scheme models for each type:

Defined contribution – the individual builds up a pot of money that can then be used to provide an income in retirement based on how much money has been paid into the pension pot;

Defined benefit – pays out a secure income for life which increases each year based on the individual’s salary and how long they have worked for an employer.

Act In Good Faith

Use the property for its lawfully designated use only. Do not try to run a business from a residential apartment, or smoke inside the premises when the contract clearly instructs otherwise. No landlord wants to deal with tenants who make a mess of the apartment with broken appliances and dirty walls. Acting responsibly in good faith and treating the property as your own will ensure that you get back your security deposit in full without any glitches.

Defined contribution pension schemes:

Individual/ personal pensions: these include workplace pensions, private pensions chosen by the individual and stakeholder pensions.

Group personal pension: the employer chooses the pension plan but it is an individual contract between the employee and the provider.

The average age of retirement in the UK is 64.7 for men and 63.1 for women.

Pensions For Business Founders:

As a startup founder, you may be self-employed and therefore without a entity to provide you with a pension. If this is the case, you will need to think about preparing for your retirement and setting up a pension scheme.
Options for individual founders and business owners include the State Pension, stakeholder pensions, personal pensions, and Self-Invested Personal Pensions (SIPPS). Once you are solely obtaining income from your business, you should seek legal advice as soon as possible to set up an appropriate pension scheme for your needs.

Pensions And Employers:

If you have employed or are thinking of employing staff in your business, you will need to get to grips with pension law quickly as you are likely to be required to provide your employees with a workplace pension scheme.

Workplace Pensions

In addition to the State Pension, employers must now automatically enrol their employees into a workplace pension scheme (following new laws passed in 2008) into which the employee, the government and the employer will contribute.

How It Works?

A percentage of the employee’s salary is put into the pension scheme automatically every payday. In most cases, the employer will also add money into the pension scheme. Both get tax relief from the government. The employer must automatically enroll any employees aged between 22 and the state retirement age, earning at least £10,000 per year and working in the UK.
As an employer, you cannot refuse an employee from joining the pension scheme even if they do not meet the minimum earnings criteria. You must also give your employees the opportunity to ‘opt out’ of the pension scheme.

Does The Law Apply To You And Your Employees?

Automatic Enrolment doesn’t just apply to businesses, it applies to anyone who has at least one member of staff (this includes a cleaner or a personal care assistant). To find out if and when you need to comply with the workplace pension law, you can go to the Pensions Regulator website and enter your employer details here. You may be able to delay your staging date by up to 3 months.

Employer’s Obligations

If you meet the requirements for automatic enrolment into a workplace pension scheme, you will have to do the following:

  • Contact the Pensions Regulator and confirm your contact details;
  • Choose and sign up to a pension scheme that is eligible for auto-enrolment;
  • Work out which employees you need to put into the pension scheme by your staging date;
  • Write to each member of staff to explain how automatic enrolment applies to them.

In the letter, you must tell your employees:

  • the date you are adding them to the pension scheme
  • the type of pension scheme and who runs it
  • how much you will contribute and how much the employee will have to pay in
  • how they can leave the scheme if they want to.

Once you have completed all of the above steps, submit a Declaration of Compliance to the Pensions Regulator stating that you have met your legal obligations.