Essential guide to pensions for senior managers

There has never been more choice and flexibility for senior managers when it comes to pension saving. Most employees can choose from a wide range of investments for their pension fund, contribute more to their own retirement, and exercise greater control over drawing their income.

At a time where life expectancy is increasing and there is less certainty about future financial security, a good pension scheme can be an invaluable benefit.

Business benefits of pensions

Pension options

Nearing retirement

Financial advice

1. Business benefits of pensions

Occupational pension schemes are expensive but the value they create usually makes the outlay worthwhile.

You can differentiate your firm from your competitors

• Offering a superior occupational pension scheme can help you attract the best staff.

Providing attractive employee benefits retains key senior individuals

• They may be crucial to the success of your business.

Good employees should be rewarded and pensions are seen as a valuable benefit

• Ensuring staff are well looked after creates loyalty.
• Delivering robust benefits for senior employees motivates upcoming talent.

Company pensions help provide financial security in increasingly uncertain times

• In reality, a pension scheme is no more than deferred salary.

2. Pension options

All employers are now required to provide an automatic enrolment pension scheme

• The system of automatic enrolment was completed in February 2018 and is now mandatory for all new employers.
• Employers must contribute to the scheme for almost all workers unless workers opt out. Employers must contribute a minimum 3% and total contributions by both employer and employee must be 8%. So employee contributions depend on the amount paid by the employer in order to reach the total minimum.
• Many small firms that previously did not offer a pension scheme have elected to use the low-cost, low-charges state-run scheme known as NEST (National Employment Savings Trust).

Companies are no longer required to provide access to a stakeholder pension

• Where an employer already had a designated stakeholder scheme, existing members must be permitted to continue making contributions.

Different types of occupational pension plan are available

• The most common types of occupational scheme are defined benefit (DB) and defined contribution (DC) schemes.
• There are a number of supplementary and alternative schemes available.

Additional voluntary contributions (AVCs) allow members to top-up their main pension plan

• AVCs are DC schemes.
• There are two types of AVC: an in-house AVC run by the employer; and free-standing AVCs which are run by an external provider.
• Like other pension contributions, AVC contributions up to 100% of earnings qualify for income tax relief subject to an overall annual allowance of £60,000 (£40,000 prior to 1 April 2023).

Personal pensions can also be used to top-up occupational plans

• Personal pensions can also form the main retirement plan.
• Employer contributions are deductible against corporation tax.
• Group Personal Pensions (GPPs) combine individual personal pensions into one plan, allowing for cost efficiency. They operate under the same rules as individual personal pensions.
• Personal pensions are DC plans which means the individual rather than the employer bears the investment risk.
• The usual minimum retirement age for personal pensions is currently 55.

Executive Pension Plans (EPPs) are defined contribution plans provided by the employer

• EPPs are run by a life assurance company.
• Employer contributions are deductible against corporation tax.
• Employees are not liable to income tax or National Insurance contributions (NICs) on payments made to an EPP.
• Contributions are subject to the £60,000 annual allowance.
• Members can transfer existing plans into their EPP.
• The frequency and amounts payable to an EPP are usually flexible.

Self-invested Personal Pensions (SIPPs) are similar to standard personal pensions

• SIPPs allow greater investment freedom.
• SIPPs are governed by the same tax, contribution and eligibility rules as personal pensions.
• SIPP investors can control their investment strategy and hire a fund manager or broker to carry out investment decisions.
• SIPPs are run under trust law. The member can be the trustee if the plan is overseen by an independent administrator.
• Administration costs can be high.

Small Self-administered Schemes (SSASs) are occupational plans

• They are usually made up of directors and senior managers.
• Set up under trust deed, SSASs encourage greater control over investments and assets.
• SSASs can be expensive to set up with adviser, trustee and management fees.
• Employer contributions are deductible against corporation tax.
• An SSAS can lend money to the employer provided the loan does not exceed 50% of the net value of the scheme's assets.

Pensions salary sacrifice allows employees to exchange earnings for non-cash benefits

• This means both employer and employee make National Insurance (NI) savings.
• Employee pension contributions are converted into employer contributions which do not incur NI.
• The employer can pass NI savings to employees as a bonus contribution to the plan.
• Care should be taken to make sure any salary sacrifice arrangements do not take workers’ pay below the National Minimum Wage.

3. Nearing retirement

A pension pot can represent as much as 40 years of saving, which means the final stages of retirement planning must be executed carefully.

Employees no longer have to retire to claim their pension

• It will become increasingly common to start drawing a pension while still employed, possibly just part-time.
• Encouraging senior managers to continue working could benefit your business.
• Make sure core employees understand the cost of taking benefits early.

By law, you can no longer retire employees at a default retirement age

• There must be a fair reason for dismissal such as capability or conduct, or the retirement must be 'objectively justified' (which is unlikely in most situations).
• Employees may choose to work beyond the state pension age of 66 (increasing eventually for those born after 1960 to 68). You can check your state pension age on GOV.UK.

Your options are more limited with a final salary scheme

• Your only options are to take a tax-free lump sum and an income.
• The income is guaranteed until you die.

Restrictions on how defined contribution pension funds can be accessed have been removed

• Members can withdraw lump sums (including a tax-free lump sum of 25% of the total fund).
• Members can also invest in an annuity or flexible income drawdown plan (or both).
• Income drawdown plans allow members to vary the timing and amount of withdrawals but do not provide a guaranteed income.
• Savings left in your pension fund when you die can be passed on in your will.
• Withdrawing large sums in any one year can increase the income tax rate payable.

Consider offering senior employees a detailed financial review

• This can help them make the best decisions at the date they choose for retirement.
• Provide a comparison of options available to senior managers.
• Make sure all the company pension booklets are up-to-date and available to scheme members.

4. Financial advice

You should always seek professional advice when setting up a pension scheme

• Always take advice when assisting employees in making pension arrangements.

Employers should consider paying for financial advice for employees

• Pensions advice worth up to £500 a year can be offered as a tax-free benefit to employees.

Ensure that any adviser you use is regulated.

• Contact the Financial Conduct Authority to check.