Incentives for Growing Companies No.9: Pension and Retirement Plans

Pension Plans for Employees:

Defined Benefit Plans: an employer guarantee of a specific retirement benefit for employees, based salary history and years of service. Your organisation is responsible for funding the Plan, as well as  managing the plan's investments. Most commonly, that work is contracted out to a pension administration firm.

• less common
• higher cost
• and complex

But, a HUGE attraction for more senior employees that are – obviously – closer to retirement.

Defined Contribution (DC) Plans: both you, the employer and your employees, make regular contributions to an individual retirement account or a group plan. The eventual retirement benefit depends on the contributions made, and the performance of the invested funds. Again, that work is often contracted out to a pension administration firm, or investment firm.

• Far more prevalent
• In the US, the most common type of DC Plan is a 401(K) – which many of you may have heard of. In the UK, workplace pension schemes are the most common DC plan. By far the most common are "Automatic Enrollment" schemes, introduced in 2012. Under the Automatic Enrollment scheme, employers are required to automatically enroll eligible employees into a workplace pension scheme and make contributions to their retirement savings, unless the employees choose to opt out.

A sensible way to encourage savings for retirement.

There are two types of ‘Automatic Enrollment’ pensions:

Occupational Pension Schemes: a pension scheme established by you for your employees. There are really only two types:

• Trust-based schemes - managed by trustees who hold the pension assets on behalf of the members
• Contract-based schemes - provided by insurance companies or other financial institutions

National Employment Savings Trust (NEST): NEST is government-sponsored, a trust-based occupational pension scheme and is available to employers of all sizes – but really suits smaller organisations with a low-cost and simple pension approach where you do not want to set up your own pension

Some technical stuff:

Vesting: Vesting refers to the period of service an employee must complete to gain full ownership of employer-contributed funds in a pension plan. Some plans vest gradually over time, others will have immediate vesting.

Pension Plans for Founders:

If you own and operate your own businesses, pensions can be more flexible – but also more complex. That depends on the legal structure of the business, its jurisdiction and so forth.

Probably the best examples are:

Self-Invested Personal Pensions (SIPP): a type of personal pension plan in the UK that provides individuals with control over their retirement savings. It allows for a wide range of investment choices such as equities, bonds, even property. If you are self-employed or own a small business you can contribute to a SIPP and benefit from tax advantages while saving for retirement

Small Self-Administered Schemes (SSAS): are designed for small businesses, with fewer than 11 members. They allow the owner to act as trustee and have greater control over investment decisions. A SSAS can provide retirement benefits to business owners and selected employees.

Stakeholder Pension: Stakeholder pensions are low-cost, flexible pension plans available to individuals in the UK, including self-employed individuals. They were introduced to encourage retirement savings and quite flexible around investment options. The good news is that stakeholder pensions have to have low charges and flexible contribution levels.

…and then there are

Personal Pension Plans: available to employed or self-employed (in the UK), offered by financial institutions, they allow individuals to contribute to their pension and benefit from tax advantages.

These examples represent some of the retirement savings options available for self-employed individuals and small business owners in the UK. You would obviously need to consult with financial advisors and/or pension specialists for advice on specific circumstances, and the very latest regulations.

See: Office for National Statistics (ONS), or The Pensions Regulator