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Summary Pension Considerations - Private Acquisitions
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Condenses all the reading, lectures and SGS activities to about 30% the original volume. Clear, Concise and Organised.

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  • May 12, 2023
  • 9
  • 2022/2023
  • Summary

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8. PENSIONS

 Pot of money saved up over employee’s working life into which employee/employer make
contributions to provide employee/their estate an income during retirement
 Benefits from relief from income tax subject to certain limits
o Not taxed on its way into a pension scheme = sum invested is larger



OCCUPATIONAL PENSION SCHEME

 Set up and run by employer to provide employee benefits on retirement/death
 Usually set up under trust = assets held on trust by trustees
o Administer trust in accordance with trust deed and scheme rules
 Aka the definitive deed and trust
o Assets of the pension scheme do not belong to operating company itself
o Trustees add expense to the pension



DEFINED CONTRIBUTION SCHEMES (aka money purchase schemes)

 Becoming more common – often cheaper for employer to provide and give employer
greater certainty as to pension costs – employers prefer
 ‘Defined’ = defined from employer’s POV (employer’s liability fixed)
o employer sets up and agrees in advance what level of contributions it is prepared to
make on behalf of employees (liability fixed to this amount)
o usually expressed as % of each employee member’s annual salary
o employees usually required to make contributions too as fixed % of salary
o output depending on performance of investment contributions
 contributions made by/on behalf each member kept separate so its poss to know at any
one time how much each has
 benefits on retirement depend entirely on return contributions

 Annuity = insurance product that provides retired employee with a regular stream of
income until death
o Depends on how big pot has grown and how long life insurance company thinks
person will live for

 Since 6 April 2015 it is now also possible to drawdown some or all of the money contained
in the pension pot, 25% of which will be tax free with the rest being subject to income tax.

 NEST = government-run DCS (qualifying scheme for auto-enrolment legislation) to help
small employer comply with auto-enrolment obligations
o Both employer and employee can contribute
o If employee leaves, can take pot to the next employer
o Keeps charges for managing members’ pensions low

, FINAL SALARY SCHEMES (aka Defined Benefit Scheme)

 Defined = defined from employee’s POV - aim is to provide fixed % of employee’s final
salary dependent on number of years service
o e.g. 1/60 x number of years worked
o members generally contribute a fixed % and employer pays balance of the cost of
the annuity required to fund promised pension
 = uncertainty for employer – have to guarantee certain level of pension
regardless of performance of investments under the pension pot + costs of
annuities on market at time of retirement

 At least every 3 years scheme actuary will prepare valuation - shows whether scheme
assets match expected liabilities
o if deficit, recovery plan must be agreed, setting out level of employer contributions
needed to ensure scheme on track to meet liabilities

 employer cannot predict cost of providing retirement benefits with any certainty due to too
many variables
o e.g. how long employee will actually work for, performance of stock market etc
o costs tend to rise in times of economic downturn due to reduced returns on
investments
o costs around 25% of employees salary (10% for defined contribution)
o expensive for senior managers/directors who earn high salary during final years

 subject to more regulation
 benefits employee more than employer, increasingly rare


GROUP SCHEMES

 Operated for employees of a group of companies
 One co. within the group will be the principal – provides the scheme
 Rest in group known as participating companies/employers
 Scheme’s trust deed gives principal powers that other participators do not have e.g. power
to terminate the scheme
 Single employer scheme = for the benefit of employees of one employer

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