Occupational/Company Pensions

These are employer run schemes that have trustees who are responsible for the schemes being run properly, legally and fairly. If your employer has a scheme it is almost always in your interests to join because of the employer contribution which is in effect a tax free benefit.

N.B. There may be a valid reason for not joining an Occupational Pension Scheme. If you do not want to join you are best seeking independent advice before deciding.

Q Can I work out how much my employer is paying into the scheme?

A If your Occupational Pension Scheme is a Money Purchase/Defined Contribution scheme your employer will tell you what percentage of your earnings the company is paying.

If you are a member of a Final Salary/Defined Benefit Scheme it may be more difficult to assess the company contribution. This is because the company contribution can change as the cost of achieving the benefit changes, owing to factors such as investment performance, salary increases and annuity rates.

 

Q Can I make extra contributions to the scheme?

A Yes. If you have a final salary pension it may be possible to do what is known as buying added years. Extra contributions can also be made to your employers Additional Voluntary Contribution Scheme (AVC).

These can also be effected on a Free Standing basis (FSAVC) although since A-Day Personal Pension Plans are more likely to be used especially in preference to FSAVCs.

 

Q If I am a member of an Occupational Pension Scheme can I also take out a Personal Pension?

A Yes, provided the maximum allowance is not exceeded. 

 

Q How much tax free cash can I take from my Occupational Pension Scheme?

A It depends on length of service with your employer, when you joined the scheme, your final earnings and the scheme rules. Commonly the tax-free cash sum is 3/80ths for each year of membership multiplied by your final pensionable earnings.

Eg. 10yrs service x 3/80 x 20,000 = £7500
Any tax-free cash taken will reduce your pension.

Membership of an OPS after 6th April 2006 will have a tax free cash sum of 25% of the pension fund.

Q How do I know how my Occupational Pension Scheme is performing?

A By asking the trustees/your employer. Information on fund performance should also be available to you.

 

Q How do previous employer pensions affect my existing one?

A Only to the extent that they are taken into account when assessing your total final retirement benefits which cannot exceed the Lifetime Allowance(LTA) of £1.65million(2008/09)

 

Q Is it worth me opting out of my employers Occupational Pension Scheme and taking out a Personal Pension?

A Almost never! After all, your employer makes a contribution to the Occupational Pension Scheme which would not be available if you did not join and instead took out your own Personal Pension.

 

Q What types of Occupational Pension Scheme are there?

A There are two basic types of scheme:

1. Final Salary/Defined Benefit

The amount of pension provided is calculated by reference to the number of years service with the employer and the final salary of the employee.

As an example let us take a member of a 1/60th scheme with 20 years service and a final pensionable salary of £30000. The calculations would be as follows: -

Pension = 1/60th of final salary x the number of  years earnings (20 years)

i.e. 20/60   x  £30,000  = £10,000 per annum pension

A tax free cash sum is usually available by trading off part of the pension. The maximum is normally 3/80 for each year of service. Using the above example:-

20 (years service) x 3/80 x £30,000  = £22,500 tax free cash

Taking the tax free cash would of course reduce the pension accordingly.

Final Salary schemes are expensive for employers due to the guarantees and the legislation surrounding such schemes. They therefore tend to be available only in the largest companies and the public sector e.g. Teachers, Nurses, Civil Servants etc.

 

2. Money Purchase/Defined Contribution

With these schemes the amount of pension received is determined by:

a) The contributions invested
b) The investment returns achieved by the fund 
c) Annuity rates available at retirement  
 
Almost all new Occupational Pension Schemes are set up on a Money Purchase basis.

Also because of the increasing costs of running Final Salary schemes many employers are changing, or restricting new employees, to Money Purchase.

The pension provider/trustees will send out an annual statement advising the member on the value of the fund and the pension it may buy.

As there are no guarantees with Money Purchase Schemes, members should regularly keep an eye on the progress of their fund to ensure that there will be enough to buy an adequate annuity at retirement.

 

Q What are Small Self Administered Schemes (SSASs)?

A These are small (less than 12 members) company pensions for director/shareholder run private limited companies. The main advantage of a SSAS is that the members have control over where the funds are invested eg. stocks and shares, commercial property etc.

There are strict Inland Revenue guidelines on permitted investments. Many SSASs are started in order to use the fund to buy the company property which the company then rents from the pension fund. Independant Financial Advice is required when setting up a SSAS.

 

 

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