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Pension planning for businesses

It's a common concern that individuals, often the younger generation, put off arranging their financial future and Nightingale Associates are encouraging not only individuals to plan for their pensions now, but businesses as well.

In October 2012 'personal accounts' will be introduced as part of the Government's reform of pension provision in the UK, with the onus transferred to employers to encourage their employees to save via their pensions. The Government's drive to encourage individuals to save for their future will result in increased costs for employers. This is due to all employees earning at least £5,035* (including temporary and contract workers) aged between 22 years of age and the state pension age being enrolled automatically into the personal accounts system at the time of introduction.

It is highly probable that business owners will incur significant additional pension costs from 2012. For those who do not currently offer a scheme or those who do not currently contribute to a pension scheme, the costs are likely to be significantly higher.

Under the personal accounts scheme compulsory contributions will be 3% for the employer and 5% for the employee from October 2016 onwards. The contributions levels will be phased in over four years. Employees will be able to opt out of the system, but will be required to do so every three years.

Employers who already offer a pension scheme may be able to avoid setting up a personal account, if an existing scheme qualifies as an alternative and this is very likely to involve a significant uplift in members and increased costs. Even so, this is worth considering as a preferable option, as these schemes will most probably provide more investment choice and allow for higher contributions. Of late, many businesses have been offering group SIPP arrangements to senior staff, which offer a range of investment flexibility.  Business owners  should consider how running their own scheme could offer a more attractive recruitment, benefit and retention tool for staff.

Personal accounts are designed to be low cost (requiring an annual management charge of only 0.35%) and they will have a limited investment choice. It is anticipated that contributions will be collected alongside PAYE administration. Personal accounts do not provide allowances for advice and it should be noted that some of the most successful group pension schemes hold work place education sessions and face-to-face enrolment.

Employers should plan for their pension future now, as although legislation is yet to be passed, principal elements are unlikely to change. Failing to comply with personal account requirements could result in fines of up to £50,000 and ongoing, daily fines for continuing non compliance.

* In 2006/07 earnings terms



Date: 18th November, 2009
Author: Michael Lockyer


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