Company pensions or occupational pensions are set up by employers for their employees.
There are two types of these schemes:
- Defined Benefit – also known as Final Salary schemes
- Defined Contribution – also known as Money Purchase schemes
Both types of scheme are set up under a trust, so that the fund is kept separate from the company’s assets. Governing trustees collectively manage the scheme. By law, in most cases these will be representatives from the employer, employees and professional parties. This is to ensure that the pension scheme remains intact if the company faces financial uncertainty or liquidation.
Defined Benefit / Final Salary schemes are considered to be the best form of company pension. These are offered to most public sector workers, including civil servants, local authorities, teachers, nurses and police. In the past, many larger private sector companies offered these kinds of schemes. However, due to their cost, many have now being closed and substituted with Defined Contribution / Money Purchase schemes or Group Personal Pensions.
With a Defined Benefit / Final Salary scheme, the employee’s retirement benefits are set out or defined in advance by the pension scheme. With a Defined Contribution / Money Purchase scheme, the retirement benefits won’t be known until the point they are taken – only the contributions are 'defined’ in advance.
||Where an employer offers a company /occupational pension scheme, they must make contributions to this scheme on behalf of their employees. In most situations, the employer’s contributions will be at least equal to the employees’ contributions, and sometimes a lot more. In some cases, the employee doesn’t make any contributions – these are known as ‘non-contributory’ schemes. The amount payable by the employer and employee is usually shown as a percentage of basic salary.|
|Tax Relief on employee contributions
||Where the employee is required to contribute a percentage of their basic salary, the amount is deducted through payroll before tax. This means the employee will benefit from tax relief at the highest marginal rate paid by the employee. These tax rules can change and their benefit to you will depend ion your individual circumstances.|
|Additional Voluntary Contributions
Employees can contribute over and above any required contribution. Where this payment is used to enhance the company / occupational scheme it is called an Additional Voluntary Contribution (AVC). These are deducted from payroll and tax relief is gained in the same way as with normal employee contributions.
AVCs aren’t the only way of supplementing a company pension. Since 2001, members of company/occupational pension plans have been able to contribute to personal pensions (including stakeholder pensions and Self Invested Personal Pensions (SIPPs) at the same time. This is known as concurrency.
|Death in Service
||In the event of death whilst still an employee, a lump sum of a multiple of salary is usually paid (eg, 2x or 4x salary). These schemes can also provide a dependants' pension in the event of death before retirement age.|
|Ill Health Pension
||If, while still employed and an active scheme member, employment comes to a premature end due to long-term sickness or injury, company pension schemes can provide an ill-health early retirement pension income. Depending on the scheme type, this may match what the pension might have been at normal retirement if the employee had stayed with the company, or may be what the accumulated fund can purchase.|