Employers are under an obligation to offer at least Stakeholder Pensions to their employees (but they are not under an obligation to make contributions) if they have at least five employees (see Chapter 4). Alternatives to this include group Personal Pension Schemes or Occupational Schemes.

Occupational Schemes

These are schemes set up by and sponsored by employers. The actual scheme is, however, run by a board of trustees, who are independent of the employer, and are there to ensure that the benefits under the scheme are properly funded and actually paid out. They also ensure that the pension funds are kept separate from the business’s own money.

Employers must contribute to occupational schemes, but employees are not obliged to contribute. Schemes in which only the employer contributes are known as ‘non-contributory schemes’.

The scheme must be approved by the Inland Revenue, which has a dedicated office, the Pension Schemes Office (PSO) for this purpose.

There are two main types of occupational schemes:

1. Final Salary Schemes, and
2. Money Purchase Schemes.

Tax Advantages

Approved Occupational Schemes enjoy considerable tax benefits. To take advantage of these tax benefits, the trust deed and the rules must comply with Inland Revenue requirements. A summary of the requirements in terms of the limits imposed is given in Appendix 2.

The tax benefits include exemptions from:

• Income Tax on all income from investments and deposits, (but see exception below).
• Income Tax on underwriting.
• Capital Gains Tax.
• Income Tax on lump sums at retirement.
• Corporation Tax for the employer’s contributions.
• Income Tax for the employees’ contributions.

However, Income Tax is payable on:

• Dividend income in the scheme’s fund.
• Refund of pension scheme contributions, at 20%.
• Refund of surplus AVCs and FSAVCs, at 32%.
• Commutation of pension into a lump sum, when the excess of the lump sum over the maximum allowable tax-free lump sum is taxed at 20%.

Final Salary Schemes

These schemes are also sometimes referred to as ‘defined benefit’ schemes, or ‘salary related’ schemes. Contributions are made to the scheme by employers and employees, in an agreed proportion. The benefits payable under the scheme are related to three elements:

1. The length of service by the employee in the scheme.
2. The earnings at retirement date (known as final pensionable salary).
3. The scheme’s ‘accrual rate’. This is the proportion of the final salary paid as benefit for each year of service.

It is usual to allow an employee to remain as an active member during a temporary absence. This may be due to illness, or taking a sabbatical. The maximum period of temporary absence allowed is 30 months. During this period of temporary absence, the member’s retirement benefits continue to accrue, and the member is covered for death in service benefits.

Money Purchase Schemes

These are sometimes referred to as ‘defined contribution’ schemes. Contributions are made to the scheme by employers and employees, in an agreed proportion. The money is invested in a specific fund for each member. The benefits under the scheme depend on:

1. The amount paid into the pension fund.
2. How well the investment performs.
3. The annuity rate at the date of retirement.

One feature of a Money Purchase Scheme is that the tax free lump sum may be drawn up to the maximum permitted by the rules or the Inland Revenue limits. Only the balance of the fund is then used to provide an annuity.

In a Money Purchase Scheme, the employer must contribute at least 10% of the total contributions.