UK Occupational Pensions

UK Occupational Pensions

Occupational pension schemes (also called Company Pension schemes) are when the employer organises a pension scheme for its employees. It can either be set up as a trust and run by trustees or entrusted to a life insurance company.

Intro.. Contributory or Non contributory schemes

Do all employers run occupational pension schemes?

Different typesMoney Purchase SchemesFinal Salary/ Defined Benefit Schemes

Tax benefits for occupational pensions

Life Insurance and occupational pensions

Forecasting what you’ll get

How safe is your occupational pension fund?

Changing Jobs

Part Time Workers

Looking for an old lost Pension?

Intro

Occupational pension schemes can be one of the following:

  • Contributory, where you give part of your earnings (typically 5% of your gross salary) in addition to your employer’s contribution.
  • Or Non Contributory, where your employer makes all the payments.
  • Open “stakeholder” schemes – these are not worth much as employers do not contribute anything – they exist because the law says all firms employing five or more people have to offer a pension plan. The law does not say they have to put anything into it on your behalf so anything comes from you. Needless to say, these plans have been a mega-flop.

But in the first two cases, the employer will pay for administration and fund management fees so a workplace plan should save you on costs. Employer schemes, in common with all others, qualify for substantial tax benefits from HM Revenue & Customs (see tax benefits for occupational pensions)

If you can join an occupational pension scheme then do so. Refusing it is likened to turning down a pay rise. You may dislike your pension payment / contribution being held back from your monthly pay packet and going into your occupational pension scheme. Think instead of it as money saved for you and your future. It is true that you can’t (except in exceptional circumstances) ask for your money back. However, when you retire, you can claim 25% of the pension’s value as a tax free lump sum. So that’s something to look forward to!.

An Occupational pension doesn’t have to tie you down. You can change jobs and it could keep growing for you without you making any more payments / contributions.

If you have one already but are concerned that it is not good enough and want to save more then you can increase this e.g. by making Additional Voluntary Contributions (see AVCs and FSAVCs). FSAVCs are rarely sold nowadays as pensions specialists have realised they are a waste of space for most people. AVCs from your employer are much more worth considering as the boss picks up the costs and, if your employer is good, offer you a bonus. This could be as much as £1 for every £1 you volunteer to put in up to an overall annual limit.

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Do all employers have an Occupational Pension scheme?

They don’t have to though it would be unusual for a large employer not to provide one. Many smaller businesses don’t have one. If your employer doesn’t provide one, or a similar scheme such as a Group Personal Pension plan, then you really should consider taking out a personal pension

NOTE any employer with 5 employees or more has to offer a Stakeholder pension to all their employees. But they don’t have to contribute.

 

Different types of Occupational Pension schemes

Money Purchase Schemes

These are also known as Defined Contribution Schemes and are one of the two main types of occupational pension scheme (the other being the Final Salary Scheme).

The Money Purchase Scheme is where the employee effectively has their own “pot” within the occupational pension fund. How much of a pension s/he ends up with depends on:

  • How much has been paid in (by the employee and/or the employer)
  • How well the pension fund has grown i.e. how well the fund managers have done in investing the fund. You may also be given the choice of several funds so you can move from riskier equities to safer bonds and cash during your last years at work.
  • What the annuity rates are at the time you retire and buy one.

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Final Salary Schemes

These are also known as a salary related schemes or defined benefit schemes and are one of the two main types of occupational pension scheme (the other being the Money Purchase Scheme). These are the pensions “gold standard”.

Final Salary Schemes are when you are promised a certain level of pension when you retire. Outside the public sector, few firms now offer final salary plans to new employees and some have cancelled schemes for current employees.

What you get from a final salary scheme typically depends on:

  • Your salary just before you retire.
  • The number of years you’ve been a member of the pension plan.
  • Your “accrual rate”: this depends on your length of service. You get, say, 1/60th of your final salary for every year you’ve been a member of the pension plan. (If you’d worked for 40 years this would calculate as you getting a pension of 2/3 of your final salary). You cannot get more than two-thirds but as many accrual rates are in 80ths or even 120ths, you would have to work for more than a lifetime to get the maximum two-thirds.

If you have been in more than one scheme, you will collect more than one pension but each will be based on what you were earning when you left, the time you were in the scheme and its accrual rate.

You may find that part of your final salary pension replaces part of your state pension entitlement.

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Tax benefits for Occupational Pensions

Prior to April 2006 there were various limits placed on what you could contribute into your pension. (See UK Pension contributions pre 2006)

Since then much simpler, more flexible rules have been introduced to money purchase, final salary as well as personal pension schemes.

Every year you will get tax relief on your contributions of up to 100 per cent of your earnings. This is subject to an ‘annual allowance’ above which tax will be charged. This annual allowance is set so high that only the very rich are affected. From April 6, 2010, you can put up to £255,000 into a plan each year. But for those earning over £100,000 a year, new rules prevent them gaining full tax relief on contributions.

But obviously, you can only be in one employer scheme at any one time as an active member (unless you have more than one part time job).

For the full and latest details on company pension contribution limits go to the UK Government’s advice web site

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Life Insurance and Occupational Pensions

Occupational pensions often pay out a generous death benefit if you die before retirement. This is usually four times earnings although it can be much higher such as 10 times if you die whilst actively working for the employer – a workplace accident for example. They usually include provision for a spouse’s pension too. These benefits can apply both to money purchase and to final salary schemes.

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Forecasting what you’ll get

If you have an occupational pension your firm’s pension or human resources department can tell you how it is doing and what you are in line to get. Do this with any previous employers whose pension schemes you are still part of. If it falls below what you are hoping for you can get an AVC or FSAVC. You could also invest extra money in an ISA.

Sacrificing your salary to get a bigger wage packet

Salary sacrifice is a way of reducing your salary to get higher contributions from your employer to your Occupational Pension Plan. This can be beneficial particularly the higher paid you are. Salary sacrifice can also save on national insurance payments – both yours’ and your boss’s.

So you will effectively end up with more to spend each month whilst making the same contribution to the pension plan. It’s win-win (which is why the Revenue would like to change the rules!)

You’d need to ask your employer’s pension department to see if it operates such a scheme. If it does, it will send further details. You may find that you are already in salary sacrifice.

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How safe is your Occupational Pension fund

The Pensions Regulator is the watchdog for work-based final salary pension schemes in the UK.

The responsibilities of trustees (who now include external professionals as well as employees) were increased considerably. It is now obligatory for the occupational pension fund’s external advisers to act as whistleblowers if they think something is wrong.

The new Fraud Compensation Fund will deal with losses due to wrongdoing. But the greater problem occurs when the firm offering the final salary pension goes bust. The Pension Protection Fund will then step in although this does not guarantee to pay out the pension at the same level as you would have had. The PPF has limits on individual payouts. So the higher paid (or those who were in the scheme for decades) are likely to still lose out.

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Changing Jobs

Always check what effect leaving your existing Occupational Pension Plan may have.

Also check the terms of the new one you may be joining or you may find you lose out somehow.

When you join a new firm, which has a company pension plan scheme, if you have an existing personal pensions it is very likely that joining the occupational pension would be better for you.

You could do a number of things eg transfer your personal pensions fund to your new scheme (not all allow this) or, more likely, stop paying in to the personal pensions fund but leave it to carry on growing.

This would depend on the terms of your personal pensions ie would there be penalties?

You would probably need to consult an IFA or the pension provider to decide.

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Part Time Workers

A series of landmark legal decisions means it is now illegal to discriminate against part time workers (often women). Part time workers now get similar pension rights to full time workers. These are, of course, adjusted to take care of the number of hours worked each week.

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Looking for a lost Pension?

If you have lost contact with an old company pension scheme and are trying to trace it try the free service from The Pensions Tracing Service at

https://www.gov.uk/find-lost-pension

if the link doesn’t work enter their main website at
http://www.thepensionservice.gov.uk/home.asp

or phone 0845 6002 537

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