Occupational (Company) Pensions

Occupational pension schemes are arrangements established by employers to provide pension and related benefits for their employees. In addition to providing for the employee after retirement, they also provide for dependants in the event that the employee dies in service.

Occupational Pension Types:

Contributory
(You give part of your earnings (typically 5% of your gross salary) in addition to your employer's contribution);

Non-Contributory
(Your employer makes all the payments);

Open Stakeholder Schemes

These schemes are not worth much since 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. 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.

Occupational pensions are a great way of saving for the future; not only do you get tax relief on your contributions, but most employers who run occupational pension schemes also make contributions to the scheme on top of those paid by you.

Occupational pensions generally offer the best deal when it comes to choosing a pension scheme.

Occupational pension plans may vary from company to company, but there are two general types of company pension schemes – a 'final salary related' and 'money purchase' scheme.

Money Purchase Schemes (also known as Defined Contribution Schemes)

These Money Purchase Schemes are a type of occupational pension fund where you build up a personal money fund based on your contributions, your employer's contribution and investment return. These schemes may ask you to make an investment choice, however, many will offer a default investment if you do not want to make an investment decision by yourself. This fund is then ultimately used to provide pension benefits.

The final amount of pension income you'll get will depend on:

  • How much has been paid in (by both the employee and the employer);
  • What the annuity rates are at the time you retire and buy one;
  • The charges that are taken out of your fund by your pension provider;
  • How well your investments have performed;
  • The type of annuity you choose;
  • How much you take as a tax-free lump sum.

If you leave the company, you will stop paying into the pension, and provided you have been in the scheme for at least two years or more, then the benefits in the scheme can be left as a deferred pension. Otherwise, the pension could be transferred into another scheme. However, there are risks and costs associated to that process. Always check what effect leaving your existing Occupational Pension Plan may have.

Final Salary Schemes

Also known as Defined-Benefit Schemes and Salary Related Schemes, Final Salary Schemes provide a pension based on your salary and the number of years you have been in the scheme. A large number of UK employers offered their employees access to a defined benefit Occupational Pension plan, often based on final salary. In such an arrangement, the employee was promised a pension of a fixed proportion of their salary in the period leading up to retirement.

The amount you get from a Final Salary Scheme depends on:

  • Your salary just before you retire;
  • Number of years you have been a member of the particular pension plan;
  • Your "accrual rate";

This depends on your length of service. For example, you get, 1/60th of your final salary for every year you have been a member of the pension plan. 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. If you leave the company, you will stop paying into the pension, and provided you have been in the scheme for 2 years or more, then the benefits in the scheme can be left as a deferred pension. Otherwise, the pension could be transferred into another scheme. Always check what effect leaving your existing Occupational Pension Plan may have.

Final Salary Scheme’s Features

  • Ill-health early retirement;
  • Life assurance cover;
  • Survivor's and children's pensions after the member's death;
  • An option to exchange some pension for a tax-free cash sum;
  • An option to pay additional voluntary contributions (AVCs) to buy additional benefits.

In the UK an estimated 9.8 million people have a final salary pension scheme.

Benefits of Final Salary Schemes

  • Your employer will make pension contributions on your behalf;
  • Your pension entitlement is not dependent on the performance of the stock market or other investments;
  • Normally, he pension plan will increase your pension income each year in line with the Retail Prices Index (RPI) or a set percentage - whichever is the lower;
  • Your pension benefits are linked to your salary whilst you are working, so they increase automatically as your salary rises.

Risks of Final Salary Schemes

The biggest risk is for and employer to become insolvent - then there may not be enough money in the pension scheme to pay the pensions to its current and former employees. However, in April 2006, the Government set up a Pension Protection Fund to protect members of salary related pension plans. This fund pays some compensation to scheme members whose employer has become insolvent, but the level of compensation may not be the full amount.

Group Personal Pensions (GPPs)

Group personal pensions (GPPs) are a type of defined contribution pension, which some employers offer to their workers. As with other types of defined-contribution scheme, members in a GPP build up a personal fund, which they then convert into an income at retirement. In this scheme, contributions are paid from your salary to the provider, who then invests the money to build up a personal fund for you, which is converted into an income when you retire. The pension fund is usually invested in shares and stocks, with the aim of growing the fund over the years before you retire. When an employer arranges for a pension provider to set up a GPP, they may be able to negotiate better terms from the provider, than you might get if you arranged your own personal pension. This means that more of your money will be invested in the pension.

The value of investments may go up or down, and you may not get back your original contributions.

The amount of pension income you will get depends on:

  • How much you pay into the fund;
  • How long you save for;
  • How well your investments perform;
  • How much your employer pays into the fund;
  • How much you take as a tax-free lump sum;
  • The charges taken out of your fund by your pension provider;
  • The type of annuity you choose;
  • Annuity rates at the time you retire.

General Conditions of Group Personal Pensions

  • Regular payments - although payments can be stopped at any time and resumed at a later date;
  • Administration costs are deducted from the individual's pension fund;
  • Total contributions must be within permitted contribution levels;
  • An employer can make it a condition of their contributions that the employee also contributes.

Even though GPP schemes are set up by your employer, they are an individual contract between you and the pension provider. Your pension provider is likely to offer you a retirement income based on your fund, but you do not have to accept this. You should always shop around for a better rate.

If you change jobs, your group personal pension is automatically converted into a personal pension and you continue paying into it independently. You can take your GPP fund you to your new employer, leave it in your personal pension plan until retirement, or transfer it to another provider. It is always a good idea to take financial advice before considering transferring a pension, as usually there can be transfer penalties and other fees involved.

Pros of Group Personal Pensions

  • Portable;
  • Tax relief for approved schemes;
  • Can be tailored to an individual employer;
  • Employer may be able to negotiate better terms from the provider;
  • Usually offer a broader range of investments than stakeholder pension schemes;
  • Contributions are optional for employers;
  • Option to take a tax-free lump sum at retirement.

Cons of Group Personal Pensions

  • Employees have to contribute into the fund by themselves if there is no employer contribution;
  • May be charges for any changes made in original plan.

Occupational Stakeholder Pensions

All employers with 5 or more employees have a legal obligation to provide a stakeholder pension scheme if they do not already offer access to a good value company pension arrangement. Typically, some employers will make contributions to the scheme on top of any contributions you make yourself. If you decide to take up an occupational stakeholder pension scheme, your employer is obliged to supply you with an annual statement of all contributions and the pension's current value, as well as supply a forecast of what the pension could potentially be worth when you retire.

General Conditions of Occupational Stakeholder Pension Plan

  • Employee must be over 18;
  • Employee must have worked at that company for at least 3 months;
  • Employee must be more than 5 years away from the pension plan maximum retirement age;
  • Employee must earn more than the minimum required to pay National Insurance contributions for 3 consecutive months;
  • Employer must offer payroll deduction facility;
  • Employer can make it a condition of their contributions that the employee also contributes;
  • Employer must record contributions made;
  • A minimum contribution is £25;
  • Total contributions have to be within permitted contribution levels;
  • Administration costs are deducted from the pension fund;
  • Annual charges capped at 1% of funds.

However, your employer does not have to offer you access to a stakeholder pension if:

  • You are able to join a occupational pension plan;
  • You are able to join an alternative personal pension scheme where your employer pays in an amount equal to at least 3% of your pay. 

Pros of Occupational Stakeholder Pensions

  • Easy to understand;
  • Low charge;
  • Flexible;
  • Portable;
  • Employer and employee get tax relief on contributions;
  • Employees contracting out of the State Second Pension get a National Insurance rebate paid into the pension and tax relief on contributions;
  • Option to take a tax-free lump sum at retirement.

Cons of Occupational Stakeholder Pensions

  • If there is no employer contribution, employees must fund the whole of the pension by themselves.