Choose the right pension scheme
Advantages and disadvantages
Advantages and disadvantages of an executive
pension plan (EPP) scheme
| Advantages |
Disadvantages |
| Contributions by the business are tax deductible as a business
expense and therefore don't attract corporation tax. |
EPPs can be extremely complex. |
| Contributions don't attract National Insurance and do not
create a benefit in kind for the employee ie there is no income
tax paid on contributions. |
They require ongoing monitoring and review.
|
| Flexibility of contributions - in profitable years, employers
and employees can contribute substantial sums, and can reduce
these in leaner years. |
|
| Funds grow free of tax - except on UK dividends. |
|
| Inland Revenue limits on contributions are set at two-thirds
of final earnings at normal retirement age, rather than being
based on age and salary as for personal plans. |
|
Advantages and disadvantages of a group
personal pension scheme
| Conditions |
Advantages |
Disadvantages |
- There are regular payments - though payments can be stopped
at any time eg for a career break and resumed when in a
position to do so.
- Administration costs are deducted from the individual's
pension fund.
- If an employer wants to use the GPP to be exempt from
having to give access to a stakeholder pension scheme, the
GPP must meet certain conditions and the employer must contribute
at least 3 per cent of basic salary.
- Total employee/employer contributions must be within
permitted contribution levels.
- An employer can make it a condition of their contributions
that the employee also contributes.
|
- Contributions optional for employers.
- It's portable.
- Tax relief for approved schemes
- Can be tailored to the individual employer.
- Option to take a tax-free lump sum at retirement.
- The scheme provider is responsible for the administration
of the scheme, not the employer.
|
- May be charges for any changes made eg if an employee
stops making contributions or decides to switch pension
schemes.
- Employees have to fund the whole of the pension by themselves
if there is no employer contribution.
|
Advantages and disadvantages of a stakeholder
pension scheme
| Conditions |
Advantages |
Disadvantages |
- Annual charges capped at 1 per cent of funds.
- Can transfer in to and out of scheme or stop payments
without penalty.
- £20 minimum contribution.
- Run in the interest of members.
- Employers must record contributions made.
- Administration costs are deducted from the pension fund.
- Employer must offer payroll deduction facility.
- Total employee/employer contributions must be within
permitted contribution levels.
- An employer can make it a condition of their contributions
that the employee also contributes.
|
- Low charge.
- Easy to understand.
- Flexible.
- Portable.
- Employer and employee get tax relief on contributions.
- Employees contracting out of the State Second Pension
(formerly SERPS) get a National Insurance rebate paid into
the pension and tax relief on contributions.
- Maximum contributions can be calculated according to
net earnings made in any year, up to a maximum of six years
ago.
- Option to take a tax-free lump sum at retirement.
- The scheme provider is responsible for the administration
of the scheme, not the employer.
- The employer does not have to contribute.
|
- Employees have to fund the whole of the pension by themselves
if there is no employer contribution.
|
Subjects covered in this guide
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Source - Business Link; Crown Copyright.
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