Setting Up Small Business Pension Schemes For UK Business Owners

As part of the responsibilities as of business owner, all employees need the option to opt into a workplace pension scheme.

The government has introduced various measures to encourage companies to do this, but many still do not offer a pension scheme.

While it might seem like another item for the inbox, choosing a workplace pension scheme isn't so tricky. We've taken a look at what you need to know when it comes to small business pension schemes in the UK.

Types of Pension Schemes

There are two main types of pension schemes: defined contribution and defined benefit.

Defined contribution schemes are the most common type of pension plan in the UK, and they're also ideal for small businesses because they're easy to set up and administer.

They allow you to contribute a set amount each month into an employee's retirement fund, which is then invested by your chosen provider on their behalf. The amount you contribute will depend on how much you can afford, but generally speaking it should be at least 2% - 5% of your salary per year (the government recommends 3%).

If you choose this option for your employees then all responsibility for managing their retirement fund will fall onto them; however it may still be worth offering advice about investing wisely so that they don't end up losing money due to poor investment decisions or lack of knowledge about how pensions work in general - especially if some employees aren't particularly well-off financially themselves!

Defined benefit pensions are paid out based on the amount of years an employee has been with the company. These are typically used by government or public sector companies and are not usually available for small business owners to setup and use.

Setting Up a Workplace Pension Scheme

Setting up a pension scheme is quite straightforward, but it's important to understand the steps involved.

First of all, you'll need to choose an employer-sponsored pension provider. This can be done in person or online through the provider's website; most providers offer an online application form for new schemes that will guide you through the process step by step.

Once you've chosen your provider and set up your scheme with them (which involves providing information such as employee names and addresses), they will send out notification letters. These will explain the details of the employer and employee contributions, including whether or not the employee needs to make additional contributions.

You should also make sure that everyone knows how much they need to pay into their own personal pension pots too - this figure may vary depending on whether they're part of an occupational scheme or not.

Legal and Regulatory Requirements

As a small business owner, you may be wondering what your legal and regulatory obligations are when it comes to workplace pension schemes. This is a basic overview of the essentials of setting up a workplace pension scheme for your employees.

Who must enrol in a company pension scheme

The employer will need to enrol and make contributions for any employees who are:

  • Aged between 22 and the official state pension age (currently 66 in the UK)
  • Earn at least £10,000 per annum
  • UK based employees even if they occasionally travel for work, or are temporarily working overseas (for example, remote working in another country)

For most employers, they will often set up a workplace pension scheme for their employees without needing to consult with them. This is known as auto enrolment.

Using auto enrolment, an employer can simply add eligible employees to their workplace pension scheme and automatically process pension contributions each month as part of their payroll service.

Setting up auto enrolment is a process that your accountant can do for you.

If you need help setting up your auto enrolment, choosing a pension provider or processing payroll, you can contact us at Henderson and Co Accountants for impartial advice.

Choosing a Pension Scheme Provider

Choosing a workplace pension scheme provider is an important decision. You will be investing in the future of your employees, so it's important to choose a provider that offers value for money and good customer service.

There are also other factors and some benefits that you may need to consider.

  • Does your workplace pension scheme provider allow you to add all of your employees? Some workplace pensions only allow you to sign up with a minimum number of employees, or have a set number of employees
  • Does the scheme meet automatic enrolment requirements?
  • What are the fees? Are there set up fees and what are the ongoing fees as part of the service? Each pension scheme has a different fee scale, so weigh up the service vs the fees before making a decision
  • Are there any additional fees for the chosen pension scheme?
  • What are the investment options? Some providers offer more investment options than others, so make sure that there are enough funds available for you to choose from when selecting investments for your pension fund

Benefits of Pension Schemes for Small Businesses

The advantages of setting up a workplace pension scheme for your small business are numerous.

Firstly, it can increase employee satisfaction and loyalty. When employees understand that their future is safeguarded, they are likely to appreciate their job more. And although many people change jobs multiple times these days, workplace pensions can act as an incentive to remain.

Secondly, workplace pensions can help you attract better employees. Employees who are looking forward often choose a long term employer based on many of the benefits they can offer including career progression, renumeration and even factors such as pension plans.

Thirdly, there are numerous tax benefits associated with setting up a pension plan for your business or employees.

Lastly but not leastly (that's not even a word), when you set up a pension plan for your employees they will have access to long-term savings that might otherwise be inaccessible without one!

Risks of Pension Schemes for Small Businesses

A pension scheme is a long-term investment, so you should think carefully about whether setting up one is right for your business.

There are potential risks associated with setting up a pension scheme for a small business.

Many of these are compliance related and can result in fines and statutory notices.

For example, if a company misses pension payments or if their pension payment liabilities change and the pension provider is not informed this can result in a fixed penalty notice (FPN).

In the event of non-settlement, this can then proceed to an escalating penalty notice (EPN) and can eventually lead to additional fees and even legal action.

The best way to avoid this is to ensure that all of your pension contributions are paid regularly and that you update records whenever circumstances change.

In addition, if there are any costs associated with running your pension fund or annuity purchase agreement (APA), these must be paid out of its assets before any benefits can be paid out to members. Meaning that there could potentially be less money available for members than expected when they retire from work.

The best way to avoid falling foul of any issues relating to pension contributions is to use a financial advisor or accounting service to keep track of your legal obligations.

Henderson and Co Accountants offer advice and a fully managed automatic enrolment service. Using an accountant means you'll stay compliant in all aspects of your pension employer contributions as well as staying up to date on changes and other legal requirements.

Best Practices for Setting Up a Pension Scheme

While setting up a workplace pension scheme can be a bit fiddly, there are a few things to factor in to make it easier.

Make sure that you thoroughly research providers and compare their fees, services, and investment options before choosing yours

Budget for costs (the annual charge you pay) and ensure that it doesn't exceed 5% of your total payroll costs for the year

Communicate with employees about how contributions will be deducted from their payslips and what benefits they can expect from the scheme in retirement

Professional financial advice for your workplace pensions

While small businesses are a vital part of the UK economy, many do not have an employee pension scheme in place. If you're looking to set up a pension scheme for your small business, there are several options available.

You can research the options available, or choose one of the pension providers that you find in the search results.

Or make life a little easier for yourself and speak to a professional financial advisor or accountant.

Here at Henderson and Co Accountants, we've worked with business of all sizes to help them find the best value workplace pension providers. If you need help picking through the options available, either drop us an old fashioned phone call or schedule a chat at your convenience.

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