What’s a Pension?
Company/Occupational Pension
Company pensions are also known as Occupational pensions and are provided by an employer to give a pension to it’s employees when they retire. You can get a Company pension on top of any State Pension you may be entitled to. If you decide not to join you will not benefit from any contributions your employer would make towards your pension as well as Tax Relief from the Government.
Tax Relief: The Government will contribute an extra £22.00 in Tax Relief for every £78.00 you place into your Comapny Pension if you are a basic rate Tax Payer (22%) and an extra £40.00 for every £60.00 you place if you are a higher rate (40%) tax payer (based on the tax year 2006/2007).
Employer contributions: most employers who run this sort of pension scheme make contributions to the scheme in addition to those paid by the member. Your pension scheme provider will give you exact details.
Extra benefits: additionally other benefits such as life assurance or a pension for your dependants if you die are also included with company pension schemes. Your pension scheme provider will give you exact details.
These days there are two main types of company pensions, and they employ either trustees or scheme managers to look after members’ interests.
Salary-related pension schemes are also known as defined benefit, DB or superannuation schemes.
With this type of scheme what you receive when you retire is mainly based upon the amount of time you’ve been in it and your earnings within a given company. Most employers expect you to contribute to the scheme in addition to those that they will pay for you. Your earnings level when you retire or average earnings during the time you put into the scheme are the determining factors they will use to work out what your pension will pay you upon retiring.
Basic salary only or basic salary with overtime and bonuses are the two most commom models used to design this type of plan. This type of scheme was very popular until rising costs and higher risks have now meant it’s all but disappearing in favour of defined contribution pension schemes.
Money purchase pension schemes are also known as defined contribution or DC schemes
With a money purchase scheme, upon retirement you trade your fund for a regular income for the rest of your life.
The fund results from your contributions which are invested along with those from your employer. How much you get when you retire depends on how well the investment has grown and is based on the total amount that both employer and employee have paid into the scheme over time.
You have a choice as to whether or not you take a tax-free lump sum from your pension fund when you retire. The remainder will be paid to you as a pension or will purchase you an annuity from an insurance company. This will then provide you a steady income when you retire - hence the term ‘money purchase’. You are in effect ‘buying’ a guaranteed regular future income with the proceeds of your investment fund built up in partnership with your employer over the years.
With a company pension it’s important that you know exactly what you need to contribute as well as exactly what your employer will place in your fund on your behalf.
It’s important to check what will happen to your pension should you change employer. Some company schemes will not allow you to transfer your pension to another occupational scheme. It differs widely from company to company, so it’s wise to check in advance.
You can still retain benefits in a previous employers company pension while taking out a new one with a new employer.
Bear in mind that pensions linked with companies are not only dependent upon how well the fund’s investments are doing - if for example the company goes out of business or decides to close it’s scheme their decision may mean you don’t get as much money as you were originally expecting. Always remember that as with any other investment, pension funds can go down as well as up.
If you’re not already a member of a company pension scheme, it’s worth investigating if your employer provides one.