Lockhart Grey Financial Planning Ltd

Employers’ pension schemes, Superannuation, Occupational schemes – defined benefit schemes / defined contribution schemes, Company pensions……. these are all manes that refer to Employer related pension schemes.

A large proportion of the UK’s working population are members of a company pension scheme. Occupational pension schemes are schemes run by your existing or former employer/s. There are two basic types: defined benefit, where the benefits paid in retirement can be based on a combination of your age, your length of service and the pensionable salary you are paid just before you retire – your final salary; defined contribution, also known as money purchase, which will pay out a pension amount based on the size of your fund, into which your contributions have been invested, at retirement

Group personal pensions are becoming more popular with employers and these are are low cost personal pension plans bought by groups of employees under the auspices of their employer. The personal pension schemes organised as a group usually share lower costs of administration. (See section on Personal Pensions)

Your employer can make a contribution to your occupational pension scheme in addition to deducting a percentage of your salary and paying this into the scheme. You may also make extra contributions to your occupational scheme to boost your pension provision up to a maximum of the the maximum limit (annual allowance), tax relief is available on pension contributions of up to 100% of your taxable earnings. (You can contribute more than your taxable earnings but no tax relief will be given on payments above that amount).

Eligibility

Eligibility to join a company scheme varies from each company to company. Many allow their employees to join either straight away or very soon after joining the company, whilst others put in place conditions before an employee can join, such as a minimum 2 years of service, or upon reaching a certain age etc.

There are two main types of company scheme, these are final salary & money purchase . There is a major difference in what they offer and how they work. At present, final salary schemes are the most common in terms of affiliated members, but a large number of firms are now switching over to the money purchase type because they are cheaper for the employer to fund.

Company Pensions: Final Salary schemes

The ‘Final Salary’ scheme

With a final salary scheme, the pension that you receive at retirement is related to your final salary before retirement and the number of years of service you have with that particular employer. A final salary in the years just before their retirement is often the average of the employee’s last three years salary before retirement. The resultant salary amount calculated for pension purposes is then multiplied by the number of years of membership in the final salary pension scheme. This figure is then divided by the schemes accrual rate to work out the retirement pension benefits before any tax free cash. This method of calculating employees retirement benefits can secure a very good pension for the rest of an ex-employees life.

Upon retirement pension benefits can be secured with the provision for a spouse of dependants pension, inflation proofing or escalation of income and of course the payment of a Tax free lump sum, which can greatly help in those early years following retirement when a former employee retires and experiences a significant drop in salary

Money purchase schemes

How they Work

Unlike final salary, money purchase schemes do not give any form of guarantee with regard to the level of pension income and they do not provide a pension that is linked to your final earnings before retirement. Contributions that are made by an employee and employer (contributory, non- contributory or a combination of the two) are invested with the intention of long term growth. The resultant fund is individually ‘allocated’ to you. Upon reaching retirement age, the money that has built up in the pension is used to purchase a pension income for that individual.

The value of your pension available at retirement is mainly dependent upon:

• How much money you have paid in over the life of the plan
• The length of time that you have been paying into your retirement plan
• How well the money has grown ie how well the fund has performed
• The annuity interest rate that the provider applies to your pension fund (if you choose/need to take an annuity)
• Level of Pension Commencement lump sum taken. (Up to a maximum of 25% of your pension fund can be drawn as tax free cash)

So a Personal Pension Plan is really a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement. This fund is then used to purchase your pension benefits, one of which is a retirement income.

At retirement you can make provision to protect your pension from the eroding effects of inflation, protect your income in the event of your death and make provision for your spouse or dependants. (see the Annuities page).