Intro
Occupational pension schemes are either:
- Contributory, where you give part of your earnings (typically 5% of your gross salary) in addition to your employer's contribution.
- Or Non Contributory, where your employer makes all the payments.
In either case your employer has to pay for a substantial part of the admin. costs of the pension scheme, by law. And you also get tax benefits from the Inland Revenue (see tax benefits for occupational pensions)
If you can join an occupational pension scheme then do so. Refusing it is likened to turning down a pay rise. You may dislike your pension payment / contribution being held back from your monthly paycheck and going into your occupational pension scheme. But it's being saved for you and will remain your money.
An Occupational pension doesn't have to tie you down. You can change jobs and it could keep growing for you without you making any more payments / contributions.
If you have one already but are concerned that it is not good enough and want to save more then you can increase this e.g. by making Additional Voluntary Contributions (see AVCs and FSAVCs).
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Do all employers have an Occupational Pension scheme?
They don't have to though it would be unusual for a large employer not to provide one. Many smaller businesses don't have one. If your employer doesn't provide one, or a similar scheme such as a Group Personal Pension plan, then you really should consider taking out a personal pension
NOTE any employer with 5 employees or more has to offer a Stakeholder pension to all their employees.
If you run a business and would like to discuss starting a company type pension for your employees you can contact an IFA who specialises in this area via here.
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Different types of Occupational Pension schemes
Money Purchase Schemes
These are also known as Defined Contribution Schemes and are one of the two main types of occupational pension scheme (the other being the Final Salary Scheme).
The Money Purchase Scheme is where the employee effectively has their own "pot" within the occupational pension fund. How much of a pension s/he ends up with depends on:
- How much has been paid in (by the employee and/or the employer)
- How well the pension fund has grown i.e. how well the fund managers have done in investing the fund.
- What the annuity rates are at the time you retire and buy one.
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Final Salary Schemes
These are also known as a salary related schemes or defined benefit schemes and are one of the two main types of occupational pension scheme (the other being the Money Purchase Scheme).
Final Salary Schemes are when you are promised a certain level of pension when you retire. This typically depends on:
- Your salary just before you retire.
- The number of years you've been a member of the pension plan.
- Your "accrual rate": this depends on your length of service. You get, say, 1/60th of your final salary for every year you've been a member of the pension plan. (If you'd worked for 40 years this would calculate as you getting a pension of 2/3 of your final salary)
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Tax benefits for Occupational Pensions
The Inland Revenue limits your own payments / contributions to 15% of any income a year, (up to a "cap" of £91,800 a year i.e. the maximum you can put in is 15% of £91,800 a year) and limits the eventual pension to two thirds of your final salary.
Personal pensions however allow you to contribute more of your earnings than occupational schemes. For example up to the age of 35 you can invest up to 17.5% of your income see contribution limits for personal pensions.
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Backdating contributions
With occupational schemes you have to take your full tax allowance for the current tax year (i.e. you can only invest a max of 15% of that year's earnings).
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Life Insurance and Occupational Pensions
Occupational pensions often pay out a generous death benefit if you die before retirement. They usually include provision for a spouse's pension too.
The ideal retirement/pension level is usually claimed to be around two thirds of the final salary (and this is what the Inland Revenue limit it to).
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Forecasting what you'll get
If you have an occupational pension your firm's pension department can tell you how it is doing and what you are in line to get. Do this with any previous employers whose pension schemes you are still part of. If it falls below what you are hoping for you can get an AVC or FSAVC. You could also invest extra money in an ISA.
Salary sacrifice is a way of reducing your salary to get higher contributions from your employer to your Occupational Pension Plan. This can be beneficial particularly the higher paid you are. You'd need to ask your employer's pension dept. or an IFA for further details.
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How safe is your Occupational Pension fund
After the Maxwell / Mirror Group pension fund scandal, the Pensions Act of 1995 tightened up the management of occupational pension funds. The Occupational Pensions Regulatory Authority (OPRA) was created.
On 6 April 2005 the Pensions Regulator took over from Opra (the Occupational Pensions Regulatory Authority). The Pensions Regulator is the new regulatory body for work-based pension schemes in the UK.
The responsibilities of trustees (who now include external professionals as well as employees) were increased considerably. It is now obligatory for the occupational pension fund's external advisers to act as whistleblowers if they think something is wrong.
However there remains discontent, particularly with the legal rights of employers to take "surpluses" from occupational pension funds and with so-called "contribution holidays" where the employer can stop making their contributions. However both these would have to be accepted by the trustees.
The new Pensions Compensation Board will deal with any losses due to wrongdoing.
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Changing Jobs
Always check what effect leaving your existing Occupational Pension Plan may have.
Also check the terms of the new one you may be joining or you may find you lose out somehow.
When you join a new firm, which has a company pension plan scheme, if you have an existing personal pensions it is very likely that joining the occupational pension would be better for you.
You could do a number of things eg transfer your personal pensions fund to your new scheme or stop paying in to the personal pensions fund but leave it to carry on growing.
This would depend on the terms of your personal pensions ie would there be penalties?
You would probably need to consult an IFA or the pension provider to decide.
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Part Time Workers
Not all Occupational Pension plans allow part time workers as members. A survey by the National Association of Pension Funds found that 6% of public sector and 14% of private sector pension schemes have limits for part timers.
If this affects you, first ask your employer. If they refuse to let you join the pension scheme then, because most part timers are women, there is a possibility that it's sexual discrimination.
The Pensions Ombudsman or an Employment Tribunal could be appealed to. (But it would have to be on the grounds of sexual discrimination).
If you win then your employers contributions to your Occupational Pension plans could be backdated from when you started the case ie your employer would have to pay in the total they should have paid in during that time.
(This would be backdated 3 years if you go through the Pensions Ombudsman and backdated 2 years if it's through an Industrial Tribunal. (Why the difference? Good question. Dunno.)
However if you were supposed to make contributions as well (ie it's a Contributory scheme) then you may have to pay your contributions backdated too.
From April 2000 a European Directive gave part timers the same rights as full timers on a pro rata basis.
In May 2000 60,000 part-time workers won the right to pension benefits backdated to 1976 at the European Court of Justice in Luxembourg. This may cost employers between £10bn and £17bn.
In 1994 part-time workers won the right to entry into a company pension scheme, but it was left unclear how far back they could date their claims. The May 2000 ruling sets the year when the relevant European legislation came into force in the UK - 1976 - as the start date for claims.
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Looking for a lost Pension?
If you have lost contact with an old company pension scheme and are trying to trace it try the free service from The Pensions Tracing Service at
http://www.thepensionservice.gov.uk/atoz/atozdetailed/pensiontracing.asp
if the link doesn't work enter their main website at
http://www.thepensionservice.gov.uk/home.asp
or phone 0845 6002 537
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