Occupational Pensions - HMRC Requirements
Over and above the state pension you may offer an occupational pension scheme to your employees as a contractual benefit to improve their post-retirement position. An HMRC approved occupational pension scheme offers certain exemptions from tax on income and capital gains. There are requirements and restrictions on the components of such a scheme:
Eligibility: You are theoretically free to extend the scheme to any of your employees (however membership may not be compulsory) but eligibility and the quality of pension provision commonly vary according to seniority and length of service. Such variations may not be based on discriminatory grounds.
Contributions: An employer's normal contributions to an exempt approved scheme are deductible as trading expenses.
Benefits: Maximum pension benefits are broadly limited to a pension of 2/3 of the employee's final remuneration and to lump sum payments of one and a half times final remuneration. There are further restrictions in respect of controlling directors and higher earners.
Retirement: As to when benefits may be paid, there must be a fixed retirement date but early retirement in individual cases of disability, disease or redundancy is permitted as is late retirement subject to maintenance of the contributions and certain benefit limits. Otherwise, early retirement within ten years of normal retirement will usually result in reduced benefit.
Transferability: Transfer values are assessable according to published guidelines and leavers can use the money either to invest in a new scheme, to buy an insurance company annuity or to take out a personal pension.
Lump Sums: - from an approved occupational pension scheme are tax free in the hands of the recipient provided certain requirements are met. However ex-gratia payments on retirement or death are potentially liable to income tax.
HMRC should be informed within three months of the establishment of a funded scheme and within three months of making payments under an unfunded scheme.