Group pension plans plans are arranged by an employer. An individual personal pension contract is set up for each employee, all of which are then grouped together under a group pension ‘umbrella’. This means that each employee has an individual pension plan with the chosen pension provider but benefits from group terms, which usually involve a lower charging structure.

Setting up a group pension and having the best pensions advice from your financial planner results in better cost effectiveness and easier pension scheme management for employers. A group pension plan is negotiated with the pension provider on behalf of a group of people and you as the employer may be able to negotiate better charging terms than you would get individually.

As a small business owner, a good pension scheme should not be looked at as an expense, but as an investment in your business. It also makes economic sense as pensions have attractive tax benefits.

For the employee this means that they get the full value of any contributions that you make for them. For example, if you, as an employer, contribute £1000 towards an employee’s pension, £1000 will be invested in their plan. If you were to put that sum towards a pay rise, the basic rate tax paying employee would only get around £680 in their pay packet after National Insurance and income tax deductions (based on 2011/2012 tax and NI rates). That’s £320 less.

For the company, contributions can be offset against corporation tax in the same way as salary.  However there is no employers NI at 13.8% to pay thus making a saving of £138 in comparison to paying extra salary.

A small business owner offering a pension has a positive effect on employees. Providing, and contributing to a pension is probably one of the most valuable benefits that an employer can offer. Employees are becoming more aware of the need to take responsibility for one’s own future retirement needs and rewarding and motivating employees with good pension provision sends a strong signal of commitment to staff, and can aid motivation, recruitment and retention of the best employees.

The new ‘compulsory’ NEST (National Employment Savings Trust) pension scheme announced in March 2010 is designed to help boost the level of pension contributions of lower and moderately paid workers. Eventually by 2016 all employees will be automatically enrolled in the pension scheme, unless they decide to “opt out”.

Although it will start to be rolled out from 2012, the auto-enrolment will only apply to large firms employing at least 120,000 people. The minimum contribution required at this initial stage will be 2%, of which 1% is from the employer.

Over the next four years more companies will be brought into this net until 2016, where all employers will be obliged to automatically enroll staff into a pension scheme. At this date the minimum contribution levels will be 5%, with 2% of this from the employer. The minimum 8% contribution will not be enforced until at least 2018.

It is essential to start planning for these extra costs on the business early.  There are significant fines payable by employers who do not comply with these new regulations.

Due to the complexity and costs of setting up a group pension, it is recommended that you seek pensions advice from an independent financial adviser.

Any questions on group pensions?

If you are a small business owner and have any questions, please call us on 01582 839280 or email us.