Occupational Pensions
5 April 2008
If you’ve got a job, you should get a pension
An occupational or company pension scheme is a pension administered by an employer on behalf of its employees. If the company you work for has one, you might want to join it, especially if your employer will make an additional contribution on top of what you put in.
Even if your employer is unwilling or unable to make a contribution it may still be a good idea to join the company scheme as the employer usually takes on the burden of handling all the paperwork and administration.
Besides, there’s no need to worry that your pension will tie you to your job if you decide to move on, as these days company pensions are fully portable. You should always seek advice before moving your pension as in some cases it may be better to leave your money where it is.
There are two main types of occupational pension scheme - final salary schemes and money purchase schemes. Here we outline how both types of scheme work.
Final salary schemes
Final salary schemes are also known as defined benefit or salary-related schemes, and essentially provide you with an income in your retirement based on how much you are earning when you retire. This kind of scheme is known as a defined benefit scheme because it aims to pay you a specific proportion of your final salary when you retire, depending on how long you have been part of the scheme.
Although final salary schemes are traditionally regarded as the best deal for employees, the number of employers offering them has fallen in recent years, as changes in regulations and uncertain stock markets have resulted in schemes being closed.
Money purchase schemes
Money purchase or defined contribution schemes are similar to personal or stakeholder pensions, owned by the individual employee but administered by the company. Again, many such schemes involve both the employee and employer making regular contributions to a pension fund, whose investment strategy is usually agreed by the members and trustees.
On retirement, the individual can access their fund to provide an income, usually through the purchase of an annuity. The amount you receive will depend on how much you and your employer have invested on your behalf over the course of your working life, as well as how the investments in the fund have performed.
Although the structure of occupational money purchase schemes and personal pensions are essentially the same, occupational schemes may give you a better deal because your employer is usually required to make a contribution.
For both types of scheme, contributions made by you and your employer are eligible for tax relief, provided the scheme is registered. Paying in to a company pension scheme may also require you to contract out of the state second pension, allowing you to pay reduced national insurance contributions. Decisions about contracting out, however, rest with your employer.
Alternative occupational pensions
Some companies may offer alternative forms of pension scheme. These include hybrid schemes that work as money purchase schemes while also taking into account your final salary. Career average schemes base the amount you receive on your average salary for your working life, rather than on your final salary.
Changing jobs
In the UK market, it is becoming increasingly common for people to change companies and even their careers during their working lives. The rules governing registered occupational pension schemes take this in to account, however, ensuring that you can continue to save after you change your job.
If you have been paying into the pension scheme at your old company, you should be able to transfer your pension fund to the pension scheme of your new employer, if they have one. Or you can transfer the fund to a personal or stakeholder pension scheme. If you have being making contributions for two years or more, you usually have the option of preserving your pension, to be paid out when you reach the scheme's retirement age.
If you have been contributing to your company pension for less than two years, you may be able to obtain a refund of your contributions, although this may depend on the rules of your particular scheme and may mean that you lose the contributions paid by your employer. Again, if you are unsure you should seek financial advice.
Additional voluntary contribution (AVC) schemes
Additional voluntary contribution (AVC) provides a method of saving more than your occupational pension scheme normally allows. Typically, these are money purchase schemes run by external insurance companies. The advantage is that your employer will usually pay the administrative costs associated with the scheme, making it an attractive alternative to setting up a personal pension fund. You may also be able to use AVC to buy extra years on your final salary scheme, if you have one. Speak to your employer to find out if this is an option and how much it would cost.
How to find out more
If you want find out more the best place to start is with your employer. Occupational pensions schemes are usually administered on a practical day-to-day level by the Human Resources (HR) department.
You & your money provides general information and not advice. If you are seeking advice on financial matters you should contact a qualified financial adviser. If you do not have a financial adviser and would like to contact one visit www.nsandi.com
