Occupational Pensions
Every payday, a percentage of the employee’s pay is deducted automatically from their salary or wages and invested in the scheme. The employer also contributes to the scheme on the employee’s behalf as does the government in the form of tax relief.
Since the introduction of Auto Enrolment in 2012, any employer (with at least one member of staff) must automatically enrol every employee between the age of 22 and State Pension Age earning in excess of £10,000 per annum into a Workplace Pension Scheme.
Auto Enrolment is not regulated by the Financial Conduct Authority.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.
Defined Contribution vs. Defined Benefit
There are two types of occupational scheme. Defined contribution (also known as money purchase) and defined benefit (also known as final salary).
A defined contribution scheme means that your retirement income is based on the contributions made into the plan, both by you and your employer. Most occupational schemes today are defined contribution schemes often referred to as auto-enrolment.
A defined benefit scheme is where your retirement income is based on your salary and length of service. It provides a guaranteed income in retirement and is not subject to market movements over the years. Some employers still offer these types of schemes, such as the Local Government and the NHS.
Defined Benefit and Auto-Enrolment advice is by referral only.
What Happens If the Employer Goes Out of Business?
Whether the scheme is managed by insurance companies or by the employer, the pension funds are not available to creditors of the employer, so employees’ pension pots should not be affected if the employer goes bust.
If the scheme is a trust-based scheme, employees will still get their pensions, although not as much because the scheme’s running costs will be paid out of members’ pension pots rather than by the employer.
If your scheme is a defined-benefit pension, the scheme could go to the Pension Protection Fund, who would then take over the scheme and pay you a proportion of your promised benefits at your normal retirement date.
Frequently asked questions
- How much should I be contributing?
The minimum contribution for employers is 3% and for employees it is 5% of earnings before tax.
- Do I have to contribute to my pension?
The simple answer is no. However, if you cease your contributions, your employer’s contributions could also stop.
- Can I pay more than the minimum contribution?
You can, subject to the annual allowance. You can inform your employer and they can arrange for additional voluntary contributions to be made. Your employer is not obliged to increase their contribution above the minimum amount.
- What is the annual allowance?
The annual allowance is the maximum you can pay into pension each year. It is the minimum of your relevant earnings or £60,000 (2023/24).
A meeting with Tina is filled with informative professionalism yet simplistic narrative, coupled with friendliness and of course a touch of humour.
