Company or Occupational Pensions Guide
What is a company Pension?
Who looks after the Company Pension Fund?
What types of company pensions are there?
Defined Benefit Schemes (Final Salary Scheme)
Defined Contribution Schemes (Money Purchase Schemes)
How much to pay into a company pension scheme?
What if my company pension does not cover my retirement costs?
Additional Voluntary Contributions (AVCs)
What additional benefits do company pension schemes offer?
What does the Taxman do to my company pension?
How safe is my Pension?
What happens to my pension if I change jobs?|
What is a company pension |
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A company or occupational pension is a pension scheme provided by an employer for the benefit of their employees. The employer usually pays in contributions to the employees’ company pension fund. However, in most cases it is usual for the employee to also make contributions into the company pension fund. When the employee retires, the company pension fund provides them with a pension for their retirement.
The company pension fund is separate from the assets of the company, and as such should only be used for providing retirement pensions for its employees.
Most pension funds are what are known as ‘held under trust’, in other words, the company cannot (in most cases) get at the money and use it for other purposes.
There will be a board of trustees appointed to look after the interests of the members. The trustees must run the pension scheme accordingly to the Trust Deeds and Rules.
Trustees are charged with looking after the company pension fund by investing the assets and carrying out administrative duties. However, in practice, these duties will be carried out by external specialists appointed by the trustees. The majority of company pension schemes are held under trust, but some smaller company schemes are run by insurance companies. These are called Group Personal Pensions (GPP).
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What types of company pensions are there? |
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There are many variations associated with company pensions, but basically they can be categorized into two distinct types.
A defined benefit scheme or final salary scheme is one that pays out a ‘defined’ amount when the employee retires. The amount that you actually receive when you retire, usually depends on your final salary that you were receiving just before you retired, how many years you were an employee of the company, and how long you were a member of the company pension fund. Let’s take the case of a final salary pension scheme that pays out a pension based on 1/60th of your final salary for every year that you have been a member of the company pension scheme. So, let’s assume your final salary is 60,000 GBP per annum and you have contributed into the company fund for the last 40 years.
Calculation: 60,000/60*40 = 40,000
Therefore, the pension you will receive on your retirement will be two thirds of the final salary you received whilst still working for your company, which equates to 40,000 GBP per annum. Note that the amount of pension paid out is not connected in any way to the amount of money you have paid into the company fund over the years. The final figure is defined by the amount of service, and the final salary being earned at the time of retirement.
Additional Voluntary Contributions (AVCs) are a way to make additional payments into a company scheme, so as to increase your pension income when you retire. It is very unusual for the employer to contribute anything towards AVCs, but it is the employer’s responsibility to provide employees the facility to make additional voluntary contributions.
There are two types of AVC.
1. Money purchase AVCs
2. AVC added years
By far the most popular type of AVC is a Money Purchase pension, where contributions are paid into an investment fund and used to purchase some form of pension when the employee reaches retirement age.
A lot of company pension schemes offer additional benefits along with a retirement income such as Death Benefit or Ill Health Benefit.
If you were unfortunate enough to die before you reached retirement age, your company pension would provide for some, if not all, of your dependents in the form of one or more of the following:
Lump Sum payout
Pension for surviving partner for life
Pension for dependent children
Return of contributions made
Another additional benefit are payments for ill health. Just exactly what constitutes ill health and how much is paid out in regard to ill health, will depend on the company pension scheme itself. Usually a pension paid out because of ill health will pay out immediately and for life. However, when applying for an ill health pension, you will need medical evidence to support your claim.
First the good news, normally in the UK, contributions made to company pension schemes and Additional Voluntary Contributions (AVCs) are not liable for income tax. Translated into money, it means that if you are a basic rate taxpayer, for every 78 pence you put in, the taxman adds another 22 pence. Higher rate taxpayers get a better deal, for every 60 pence they contribute towards a company pension, the taxman adds another 40 pence. This becomes really beneficial for those higher rate taxpayers that will receive a retirement pension, which will be taxed at the basic rate.
Now the bad news, the moment you start to claim your retirement pension, it will be subject to income tax. In reality, the taxman encourages you to contribute towards a pension by giving you tax relief, and then, once you have retired, takes it back off you.
Well that’s life!
Those of us who remember Robert Maxwell (did he fall or did he jump?), and the Mirror Group pension scandal, may have a few concerns regarding the safety of our company pension fund. In 1995 the Occupational Pensions Regulations Authority (OPRA) was created to toughen up the rules associated with occupational pensions. On 6th April 2005, the Pensions Regulator took over from the Occupational Pensions Regulations Authority (OPRA) and they are now the new regulatory body for work based pensions in the UK.
If you have been a member of a company pension fund or occupational pension scheme for more than two years and you decide to change jobs, you keep the value of any pension that you and your former employer contributed. (If you leave an employer with less than two years service, then you get back the contributions you have paid into a company scheme). You now have a choice, whether to leave your preserved pension benefits within your former employer’s pension scheme, or, if your new employer has a company pension scheme, transfer your pension benefits to the new scheme.
There are a number of factors that need to be taken into consideration when contemplating transferring your pension from one company scheme to another. One of the major factors is that there will usually be a large transfer fee to pay out and this may well influence what you do. It pays to take expert advice from a pensions expert. The days of staying at one company during your working life is getting more and more unlikely. People move from job to job far more frequently than they did in the past, and contribute to a number of company pension schemes throughout their career. It is very important to keep a record of what company schemes you have been involved with, and monitor the situation to make sure you have built up a sufficient amount in your pension pot to ensure a happy retirement.
