UK Fact-File Part 7:
Business Owner Welfare and Lifestyle

7.2 UK Business Domestic Pensions

The structure of pension provision for individuals in business: Domestic Pensions

All qualifying UK residents can receive the state pension. Currently, the retirement age for men is 65, for those born on or before 5th April, 1959 and 60 for women born on or before 5th April, 1950. The retirement age for women born between 1950 and 1955 will rise to 65 between 2010 and 2020, depending on an individual’s date of birth. Retirement ages for men and women born later than 1959 is set to rise gradually between 2024 and 2046.

From October 2011, the compulsory retirement age of 65 is being phased out, leaving employers with the option of not stipulating a retirement age in their company, or setting out an alternative retirement age that can be 'justified' from a business point of view, and backed up with sound evidence in this regard.

A person qualifies for a basic state retirement pension based on the amount of national insurance contributions paid throughout their working life in the UK; there must be sufficient qualifying years to qualify for a full pension. Before April 6, 2010 men need 44 qualifying years and women 39 qualifying years to qualify. For those retiring after 6th April, 2010, however, only 30 qualifying years are required.

The second state pension (previously referred to as the additional state pension or State Earnings Related Pension (SERPs) is also available for employees, based on national insurance contributions. However, this is unlikely to be of interest to the self-employed small business person, as they will not be eligible to receive this secondary pension, unless they have opted to voluntarily increase their NICs in order to protect this benefit.

For self-employed individuals, a personal pension is probably the best option as there are tax benefits to be derived from contributing to a personal pension. For example, for every GPB100 per month an individual contributes to a personal pension scheme, tax at the basic rate of 20% can be claimed back, making the real contribution GBP120 per month. This also applies where a person pays the higher rate of income tax (40%).

Group pension schemes are where an employer provides a pension scheme for employees and will usually make a contribution as well. 5% is fairly typical of the level of contribution an employer will make to an employee’s pension. Where a limited company is involved, even if there are only two directors and no employees, the company can provide a pension for the directors and make contributions as the employer. Pension schemes are tax efficient for companies.

When considering a personal pension scheme, expert, independent financial advice should be sought from a qualified and accredited advisor.

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