Occupational Pension Scheme
What is an Occupational Pension Scheme?
An occupational pension scheme is an arrangement an employer makes to give its employees a pension when they retire. Occupational pensions are also known as company or work pensions. By not joining you could be missing out on tax relief as well as contributions towards your pension made by your employer. You can get an occupational pension on top of any State Pension you may be entitled to.
There are three important benefits of an occupational pension:
- 1. Tax relief: you get tax relief on your contributions. This broadly means that with a basic rate of income tax of 22%, for every £100 you pay in, the amount you pay in tax will be reduced by £22 (based on the tax year 2006/2007). With a higher rate of income tax of 40%, for every £100 that goes into your pension, the amount you pay in tax will be reduced by £40 (based on the tax year 2006/2007).
(You can contact your pension provider for more detailed information about how tax relief works in occupational pension schemes. Or you can telephone HM Revenue & Customs)
- Employer contributions: most employers who run occupational pension schemes make contributions to the scheme on top of those paid by the member.
- Extra benefits: occupational pension schemes often offer other benefits such as life assurance or a pension for your dependants if you die. You will need to check the exact benefits with your pension scheme provider.
There are two main types of occupational pensions, both of which have either trustees or scheme managers to look after members’ interests.
Salary-related pension schemes (also called defined benefit, DB or superannuation schemes)
In a salary-related scheme, the pension you get is based mainly on the number of years you belong to the scheme and your earnings. Your pension can be based on your earnings when you retire or leave the scheme or your average earnings during the time you contributed to the scheme. In some schemes only your basic salary counts towards your pension, but others also include additional payments such as overtime and bonuses.You usually have to pay contributions into the scheme on top of those that your employer pays.
Money purchase pension schemes (also called defined contribution or DC schemes)
In a money purchase scheme, your contributions (together with any from your employer) are invested and the amount you get when you retire depends mainly on the total amount of money you and your employer have paid into the scheme over the years and how the investment has grown. When you retire, you can choose to take some of your pension savings as a tax-free lump sum. The scheme will then use the rest of the fund to either pay you a pension or buy you an annuity from an insurance company to give you a regular income when you retire. This is why they are called ‘money purchase’ schemes – you are swapping your fund for a regular income for the rest of your life.
Things to remember when you join an occupational pension scheme:
- Before you join an occupational pension scheme, one of the most important things to check is how much you will have to pay - and what contribution your employer is going to make.
- An occupational pension scheme is connected to your job. So if you leave your job, you need to check what will happen to your pension. You may be able to transfer your pension to another occupational scheme. It depends on whether or not your new employer will accept the transfer.
- If you decide to keep your benefits in your previous employer’s occupational pension scheme, you can still join another occupational pension scheme.
- No financial products, including pensions, are entirely risk-free. For example, your employer may go out of business, or decide to change, or close, their occupational pension scheme for another reason, which could mean you get less than you were expecting. Also, the amount of pension you get may depend on how well the scheme’s investments have performed by the time you retire.
If you’re not already a member of an occupational pension scheme, find out if your employer offers one. And, if you are already paying into an occupational pension scheme, remember you may be able to increase the amount you pay in. Talk to your employer for more information.