Employers’ Options When Establishing an Employee Group Pension Scheme
For an employer looking to offer its employees a comprehensive benefits package; a competitive company pension benefit is often a key consideration. A well-structured company pension plan can help attract and retain key employees and will encourage constructive employee engagement from joining the company up until retirement age.
There is also corporation tax relief available on any pension contributions that the company makes for its employees, and the option to structure death in service benefits tax efficiently as part of the benefits package.
Leaving aside Company Owners or Directors, broadly speaking employers will have 2 options to consider when structuring their company pension scheme:
A salary deducted Group PRSA Scheme
A Group Pension Scheme
There are some differences in the two options that might mean one is more suitable to the employer depending on variables such as the earning levels of their employees and their desire (or lack thereof) to contribute themselves. Some of these differences are outlined below.
Employer Obligations to Contribute
Under the Group PRSA option the employer does not need to contribute to the pension scheme. If an employer offers a Group Pension Scheme the employer must make a ‘meaningful’ contribution, although what actually constitutes a ‘meaningful’ contribution is not currently defined in pensions legislation.
Obviously, the employer’s commitment to paying in a pension premium will be a valuable benefit to the employees. Employers can set the rules as to whether the employees should also contribute to the scheme in order to encourage higher levels of retirement funding.
The table below illustrates how an employer might structure the employer/employee premium levels.
Employee Pension Contribution
Employer Pension Contribution
Combined
5% of Salary
3% of Salary
8%
8% of Salary
5% of Salary
13%
>10% of Salary
8% of Salary
18%
Limits on Contributions Eligible for Tax Relief
One key difference in the two options is the comparative limits on the combined amounts (employer and employee) that can be contributed to the pension scheme and still be eligible for tax relief.
In a Group PRSA scheme, the employee and employer combined can contribute specified age-related percentages of salary, subject to a salary cap of €115,000.
In a Group Pension arrangement, the age-related percentages are the same but apply only to the employee’s contributions. Therefore, the employee can maximise his or her own scope for income tax relief; and the employer can then pay in additional pension contributions and still receive corporate tax relief.
Pension Contract Structure
In a Group PRSA the employee is the policy owner directly.
Under a Group Pension arrangement, the scheme is set up under Trust and the Trustee owns the policy. The Trustees can be an employee or employees of the company or an independent Trustee appointed at any time.
Both structures are portable and employees will typically have a number of options as to where they transfer their fund when leaving service.
The Bigger Picture..
Regardless of the structure that is most appropriate; simply putting a pension scheme in place for your employees is only the first step. To encourage employee engagement and ensure that they understand and value their pension benefits it is critical that a comprehensive, consistent member communication plan is in place. The Employer, Trustees and Advisory firm should work together to provide employees with access to holistic retirement advice as well as scheme-specific information
Contact us at Harvest if you have any questions about a Group Pension Structure. Our Employee Benefits Team will provide straightforward advice and clarity as to your options, and ensure that your pension plan is the right one for you and your employees.
The marketing material is not intended to provide advice and is provided for general information purposes only.
The particular tax treatment contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at August 2020. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.
