Introduction to Occupational Pensions

Retirement can mean freedom – freedom from work and routine;, freedom to do what you like, when you like. A State Pension will go some small way to helping you in your later years, but a second pension is vital if you want to live life to the fullest.

Occupational pensions (sometimes known as superannuation) are agreements employers make to provide for their members of staff in retirement via a regular salary. They can also offer lump sums and provide for the dependents of employees who die.

Joining one means you are more than likely going to be better off in retirement. In most cases, such schemes do not affect your State Pension.

Usually, you will have to work for a business for a certain length of time (a few months, perhaps) before being entitled to join the company pension scheme – of which your employer is required to make you aware. This applies to all full-time and most part-time workers.

Types of schemes

Some are non-contributory, which means employees do not have to pay into them should they choose not to, while many others require only a small contribution on a staff member’s part. Employers pay most or all of the money involved.

The remuneration of a salary-related (or defined benefit) scheme is based on the number of years you work for a company and how much you earn during that time. In this case, you will probably have to add a contribution to that made by your employer, in return for the promise of a certain level of pension.

A money purchase (or defined contribution) scheme has a certain element of risk involved because the contributions are invested on your behalf. The pension you receive in retirement is based on the total payments into the pension fund and how well these investments have performed – as well as the 'annuity rate' at the date of retirement. This is the rate of exchange at which an insurance company will convert your pot of money into an annual pension allowance (paid to you in monthly instalments).

Group personal pension plans are a collection of personal pension schemes put together by a provider and offered by a business to its employees, for whom the plan has often be specially tailored to suit. The employer chooses the plan, but the pension taken out is a contract between the employee and the provider.

Tax relief

Payments you make towards your occupational pension will usually entitle you to tax relief – up to a set limit. That means at the basic rate of tax of 22%, every £100 that goes into your scheme costs you £78. At the higher rate of 40%, £100 costs you £60.

The Inland Revenue (www.inlandrevenue.gov.uk) will be able to advise you on this matter.

Paying more

The law now demands that all occupational pension schemes provide members with a yearly illustration of the amount they might receive when they retire. That means you can keep up to date and ensure you will have the retirement income you hope for.

Your employer can arrange for you to make extra contributions – additional voluntary contributions (AVC) – should you wish to do so, thus boosting your final pension figure.

On retirement the money not paid out in a lump will be used to buy an annuity - which pays the pension for life. Anyone in a company pension scheme and earning less than £30,000 a year can pay into a stakeholder pension at the same time as being a member of an occupational pension. Some people may find this more attractive than an AVC because it will pay out a tax-free lump sum, while an AVC won’t.

The stakeholder pension was introduced in April 2001 as simple, low-cost alternative to many of the pension options on the market. All companies with five or more staff members and no other occupational pension scheme are legally obliged to offer a stakeholder pension. Providers cannot charge you more than 1% of your total savings to run a scheme. They must also let you stop, start, increase or reduce payments without penalty. See our pensions guide (www.ukpensionsguide.co.uk).

Changing jobs

If you move on to another company, you may be able to transfer your current pension to your new employer’s scheme by way of a lump sum paid on your behalf (which might incur administration charges). You can definitely leave that pension and join your new employer’s scheme, or take out a private policy.

More information

The Pensions Advisory Service (www.opas.org.uk/) and The Pension Service (www.thepensionservice.gov.uk) are both excellent sources of information on occupational pension schemes.

 

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