Company Pension Benefits
Defined Benefit / Final Salary schemes:
With defined benefit schemes, all contributions are used to secure a future pension income which is based on ‘pensionable salary’, length of pensionable service, and a rate of accrual – typically 1/80th of the employee’s final year’s basic pay – which together give the ‘benefit formula’. The longer you’ve been a member of the scheme, the larger the proportion of your final salary that you will receive on retirement. Some of the accumulated pension can be exchanged for a pension commencement lump sum. The pension scheme provides the annual income.
It should be noted that, with increasing longevity, pension payment periods are extending and this additional funding liability needs to be met by the employer. Consequently, a scheme may fall into financial deficit, which the employer is unable to rectify immediately. Employers are permitted to run a deficit within a scheme providing there is a plan to bridge the gap. But should they cease trading, the scheme may not be sufficiently funded to meet its obligations. The Government has introduced a Pension Protection Fund to provide for employees in instances where this occurs, but employees not in receipt of pension benefits are only eligible to receive a maximum of 90% of the benefit formula. This level of compensation is subject to an overall cap which is recalculated each year. From 1 April 2012, the cap at the age of 65 equates to £30,644.86 (once account is taken of the 90 per cent level of compensation).
|For a workforce in general: |
Contracted-in Money Purchase (CIMP)
|For directors or key employees: |
Executive Pension Plans (EPP) Small Self-Administered Schemes (SSAS)
Contributions are invested to build a pension pot. The size of the pot will depend on how much has been contributed, the performance of the underlying investment fund(s) and how long it's been invested. When retirement occurs, some of the pension pot is used as a pension commencement lump sum. The remainder must be used to provide an income, usually through the purchase of an annuity.