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My business has had a good year but I don’t want to commit to an expensive pension plan only to be penalised when I have a bad year and can’t meet the cost. What should I do?
Penalties can occur when you break a contract. The simple answer is to make sure the contract you make does not commit you to maintaining the same level of pension contributions in the future. You need to ask the question ‘What happens if I stop paying after one year and never start again? And ask for the figures to prove it. If your pension is set up with an insurance company (or a bank) they have to meet the cost of paying their salesman/marketing dept etc and this can only come from the pension investment you are making. An Independent Financial Adviser will have far more flexibility and will give you the option of your own company paying a fee to cover the extra work they have to do to set up your pension. This fee should be in lieu of the higher upfront commission and charges that insurance companies (and banks) make.
I run a successful business and don’t want to hand over my hard earned money to an insurance company, especially after all the horror stories I have seen in the press. What do you suggest?
Simple, just send a cheque payable to your favourite journalist and ask them to invest it for you.
If the press didn’t highlight the bad cases they wouldn’t sell newspapers and there would be no publicity exposing the smaller number of bad apples.
If you really dislike insurance companies you can set up your own Self Administered Pension arrangement. Doing it yourself does not have the same economies of scale of an insurance company scheme but gives you full control (and can sometimes be cheaper if you put large sums in it). Self Administered schemes are my own area of speciality so I might be a little biased, nevertheless I still recommend insurance companies for people where it is more suitable, you just need a diligent approach.
My wife works in the business and I pay her just below the National Insurance threshold. Does she need a pension?
The short answer is yes. But there are a lot more issues here you need to consider. The first question is ‘Why below the NI threshold? She is not earning a right to a Basic State Pension whereas just a few pounds more salary will mean a small NI payment and full State Pension (subject to enough years of paying NI and meeting the minimum NI payment). The next question is ‘If someone else were doing the same job would their salary be the same or higher? Your answer to that should guide you.
The longer answer is still yes. For the simple reason that when you both retire you will each have a tax-free personal allowance of (in today’s terms) £6,500 (£9,500 at age 65). She could also have a lower rate of tax so your joint retirement income will be better.
I want to reward my staff but am worried about the risk to the business of setting up a pension scheme. What can I do?
As long as you don’t set up a pension scheme with a pension benefit linked to final salary on retirement there is little risk involved – this type of scheme is known as defined benefit and promises something like 1/60th of salary for each year of service. However all new pension schemes nowadays are set up based on a company contribution which is a fixed percentage of salary, so you will always know the cost in advance. The main risks you face are associated with the extra administration if you select the wrong company to look after it.
I want to reward some of my employees but only those who have a longer-term interest in staying with me. Is discrimination an issue here?
If you offer one-off pension arrangements to selected employees in the same way that you might pay someone more then discrimination is not an issue. However if you are setting up a blanket scheme whereby certain groups might be excluded then it is a problem. e.g. Setting a minimum qualifying salary level might exclude part-time workers. Part-time workers have the right to be treated no less favourably than full time so this is indirect discrimination.
Personal – FAQ
l really don’t understand the paperwork I get each year and pensions is so boring, surely I don’t need to worry about this until I am older, do I?
If you already have a pension then the younger you are when you get it on track the greater the benefit when you eventually need the money. For example if you have a pension fund worth £100,000 and you can reduce the charges by just 1% a year, Over a 25 year period the projected increase in the final pension fund is an extra £97,689.
My bank sorted out my pension, surely they will be looking after it, Won’t they?
I have found that all large institutions have sales targets to meet and they are all about getting in new money and selling new products. When did your bank last ring to ask if you were happy with the existing service and could they do anything to improve it?
The majority of my work is sorting out existing issues helping people planning how to get to where they want from where they are now.
On a review of the big four/five (or even 3 now) banks default pension managed fund over the last 5 years none have provided very spectacular returns. If no one is reviewing their investment performance and new people don’t even bother to ask what incentive is there for improvement? (Source: 15/11/2005 – 15/11/2010 Performance Data from Financial Express).
If you would like to try a different approach or want a brief chat to see how something may be resolved please call:
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