Group Pension Scheme

How do I choose a pension provider for our business group pension scheme?

There are a lot of different influencing factors that would help a company choose the provider for their group scheme.

Pretty close to the top of the list, in my experience, is ease of administration. Typically, people want a scheme with software that links in with their payroll department to make life easy, as payroll will be making the contributions into the scheme.

Employee support is another one companies ask me about. They want staff to feel engaged and have support and understanding around their own retirement planning. Some providers offer online services or apps with forecasting tools, so there are various ways people can engage with their pension plan, both at employer and employee level.

Reputation and financial strength is another priority. Generally, people like to recognise the name of the company that’s accepting or receiving their pension contributions. Then, of course, there are fee structures. There’s an array of charging structures within this industry, and clearly cost is a consideration too.

What type of investment funds are available for group pension schemes?

At a high level, it’s the same as with most pension plans. Typically that’s a mixture of equities – stocks, shares and bonds or fixed interest. With most group schemes, you tend to choose a default fund that all employees are invested in, often known as a lifestyle fund.

A lifestyle fund starts to take less risk as employees near retirement. Arguably, this type of scheme needs less management or involvement from an advisor like me. It’s designed around people moving from working life towards retirement.

Even though it’s a group scheme, many offer the ability for an individual employee to choose their own fund. A lot of people in group schemes sit on the default fund, but if an individual would prefer a self-managed strategy or to engage with an advisor like me, we can delve into the details and select individual funds.

Are there cost differences between group pension schemes?

Yes. When we engage with a firm or a company to see about setting up a new group scheme or transferring an existing plan, cost is near the top of the list or priorities. Actually, there’s an array of costs associated.

Some will charge setup costs, while others don’t. Some have monthly ongoing charges, based on every month’s contribution into the scheme – equally, others don’t.

The most consistent charge across the board, certainly for most providers, is called an annual management charge or AMC. If people look at their pension statement, they might well see that AMC referenced.

That’s actually charged to each individual pension plan. It’s a small percentage of the value of the plan that’s taken to run the administration of it.

Are there legal requirements for a business offering a workplace pension?

Yes. Businesses in the UK are legally obliged to automatically enroll certain members of their workforce into a pension. There’s an age limit and also an earnings limit, and anyone above those needs to be enrolled into a qualifying pension scheme.

Employees can opt out, but I generally suggest that people strongly consider remaining in the pension scheme.

It’s a requirement for employers to set this up, and they also have to make a minimum contribution. Current levels are set as 3% from the employer and 5% from the employee – that’s the minimum set by the Pensions Regulator in the UK.

Companies need to adhere to that and they have to report to the Pensions Regulator to confirm that they have a plan in place. There is also a re-enrollment requirement where every three years the employer needs to re-engage and make sure all staff are enrolled.

Pay slips usually show two different pension contributions. What is the difference between these?

It’s somewhat confusing – I’ve seen lots of payslips that don’t necessarily reference the difference.The information attached to the payment may not make a huge amount of sense. But typically, there is an employer and an employee contribution.

On a payslip, you typically see the employer version on the left-hand side before tax. The pension contribution is taken from the employee’s salary. The other side of the payslip shows the figures after tax is taken.

Pension contributions are treated slightly differently from a tax perspective and there could be some tax relief shown on the payslip. Pension deductions are either based on the ‘Net Pay’ method or the ‘Relief at Source’ method.

In the UK, we all benefit from a tax credit at our nominal tax rate and that tax credit is shown in the payslip. Effectively the employee is benefiting from a reduction in their tax liability at source – hence the term Relief at Source.

With the Net Pay method, when the contribution is received by the pension plan it’s then grossed up by that employee’s nominal tax rate. We’re getting into technicalities here, but ultimately that’s the reason.

There are two contributions on a payslip because they might be treated slightly differently from a tax perspective, employee versus employer. It’s also to make it clear that the employer has an obligation for there to be both employee and employer contributions.

What are the tax benefits for the business and employees with a group pension scheme? What are the tax benefits of making pension contributions?

We just spoke about Relief at Source or Net Pay arrangements. There is in fact a third method, which typically involves people asking if the employer is happy to do it. That’s known as Salary Sacrifice.

A salary sacrifice arrangement effectively reduces the employee’s salary in the context of income tax. It’s especially relevant for people who earn over £100,000, as they start to lose their nil rate band.

It’s known as the personal allowance, where the figure we can all earn before paying any tax currently in the UK is just over £12,500 [information correct at the time of recording in June 2025].

If someone earned over £100,000, they start to lose that personal allowance and in effect, pay more tax. So they might suggest to their employer that they sacrifice some of their salary into the pension scheme to keep their earnings below £100,000. They then retain their personal allowance – the tax benefits could be significant.

To answer the question, employees can benefit from tax relief within their payroll, reducing the tax they pay as shown on their payslip, or they can benefit from a grossing up effect where HMRC adds to the funds that have gone into the pension.

Pension contributions are a fantastic way of getting free money. In my opinion, this is the best savings plan available here in the UK.

From an employer’s perspective, contributions often are tax deductible and also go some way in reducing the employer’s national insurance contribution. Typically, the trade-off of the hassle within payroll to engage with salary sacrifice is that saving on national insurance.

The short answer is that yes, there could be significant tax benefits for both employer and employees using the pension plan.