Company pensions: 10 of your top questions easily answered

March 10, 2015

These little beauties have various names and guises: company pension, occupational pension, workplace pension…Here, we’ll try to steer you through the basics so you know what you’re dealing with.

So what is a company pension?

Joining your company pension scheme might be one of the easiest ways to save for your retirement. It’s set up by your employer to provide retirement benefits to you whilst you’re employed by them. Regular pension contributions, often based on a percentage of your salary, are deducted directly from your wages. Your employer may also make contributions directly to your pension – bonus!  Many company pension schemes also provide other benefits, like support for your partner if you die.

We covered the State Pension in our last article. For the time being, most people will get the State Pension which will cover your basic needs but it’s a good idea to have other provisions to give you a decent standard of living on retirement. A company pension is one way to do that.

How does a company pension work?

In a nutshell:

  • You join the scheme
  • A percentage of your pay is put into the pension scheme automatically every payday
  • In many cases, your employer will also add some money to the pot
  • If you pay Income Tax, the government will also add money to your pension pot in the form of tax relief.

For example

Each payday:

  • you put in £40
  • your employer puts in £30
  • you get £10 tax relief

A total of £80 goes into your pension pot.

You’ll see your money again, including any employer contributions, when you start drawing your pension.

There are two main types of company pension schemes:

1)      Occupational pensions

These are set up by your employer and fall into two categories that we’ll cover further down: Defined benefit or final salary pensions, and defined contribution or money purchase pensions.

2)      Group personal pensions (or stakeholder pension through the workplace)

These work in a similar way to a personal pension which you’d arrange for yourself. Your employer chooses the pension provider, but your individual contract will be with the pension provider. The main difference from a regular personal pension is that your investment choices may be made for you by the pension provider. A group personal pension is usually based on a defined contribution scheme.

What is a defined benefit scheme?

Aside from being one of the many pension-related things with several names?

In a defined benefit scheme, also called final salary or salary related scheme, your pension is linked to your salary, so it automatically increases as your pay rises. Your pension is based on your pay at retirement and the number of years you’ve been in the scheme, rather than on the performance of the stock market or other investments. It guarantees you a certain amount of money each year once you retire. These are now rare beasts and you won’t find many employers still offering them.

And what is a defined contribution scheme?

In a defined contribution scheme, or money purchase scheme, your pension pot is invested by a pension provider chosen by your employer with the aim of growing it. The amount you get when you retire will usually depend on how much has been paid in and for how long, and how well the investment has done.

Because it’s based on investments, the value of your pension pot can go up or down in the short term. But in the long term, money in a pension usually grows more than it would in a savings account. The pension provider will usually take a fee from the pension pot.

Do I HAVE to join my company pension scheme?

No, but it’s a really good idea to find out what benefits it offers. With the right employer contributions, your company pension could be a very good bet. If your employer won’t be contributing, compare what the workplace pension offers with other similar pensions on the market to make sure you’re getting the best deal.

What about this ‘auto enrolment’ I keep hearing about?

In the past, companies didn’t have to offer a pension scheme. But, in an effort to get more people planning for their retirement, the government has made it compulsory for all employers to offer their staff a company pension. Any staff who are eligible and are not already enrolled in a company pension will automatically be enrolled in these new pensions, hence the catchy name ‘auto enrolment’.

To be auto enrolled, you must be:

  • Aged between 22 and State Pension age
  • Earn more than £10,000 a year
  • Work in the UK.

This has already come into effect for larger firms and is gradually being rolled out to smaller companies, reaching everyone by April 2017.

Under auto enrolment, your employer will now have to make a contribution to your plan. There are legal minimum obligations in terms of both your contributions and your employers, but beyond these legal minimum obligations, your employer can choose the structure of the scheme.

You have the freedom to opt out of the auto enrolment scheme if you choose, but if you do opt out, make sure you have other pension provisions in place.

What if I’ve already got a pension?

You can join your company pension scheme even if you’ve already got money in another pension fund, but you can only be actively paying in to one company pension at a time. There’s no limit on the amount you can save up in pension schemes, but there is a limit on how much tax relief you can get on your contributions, so that’s worth bearing in mind.

What happens to my money if I change jobs?

Your company pension pot still belongs to you. Your money will still be invested, even if you don’t carry on paying into the scheme. If you start a new job, you may be able to carry on making contributions to your old pension scheme, depending on the scheme, or join a new one.

You might end up with several pension pots throughout your life, all with different providers, charging different fees and with varying investment successes. You can either just leave them where they are until you retire, or you may be able to consolidate them into one pot (either a company pension with your new employer, or a personal pension) by transferring the funds. You’ll need to investigate any charges involved. Getting some professional, independent advice can pay off at this stage.

But I’m in debt; wouldn’t I be better paying that off first?

Usually, it’s best to pay off any debt before you start thinking about saving or investing. But contributing to a company pension could be an exception to that rule because of the benefits you get in terms of contributions from your employer and tax relief from the government. But you need to make sure that you can afford to meet your other commitments first – don’t get behind on your mortgage, credit card or loan repayments.

OK, I’m interested. Anything else I should know before I join?

Our main piece of advice when deciding whether to join your company pension scheme is simply to be clear what you’re getting.  Here are some questions to ask:

  • How much are my contributions?
  • How much will you (the employer) contribute?
  • How will my money be invested?
  • Am I eligible for auto enrolment?
  • If I decide not to join now, will I be able to join later?

Once you’ve decided to join, it’s best to get on and do it as soon as possible to get maximum benefit. Some may not let you join later if you turn it down when you first join the company, so be clear on that from the off. The HR team should be able to help you with any questions you may have.

In summary

  • In many cases, your employer will contribute to your pension pot. Take it while you can!
  • There are some great tax benefits too
  • All companies must offer a pension scheme by 2017
  • Joining is usually quick and easy.

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

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