Occupational Pensions

Occupational Pension schemes are pension arrangements set up by employers to provide their employees with an income in retirement.

The employer is responsible for sponsoring the scheme but the Board of Trustees runs it. With the exception of public sector schemes, the Boardis also responsible for paying benefits.

Defined Contribution (Money Purchase) Schemes

Better known as Money Purchase schemes, the employer and employees contribute to the scheme, the money is invested and a ‘pot of money’ is built up for each scheme member.

The amount of pension is dependent upon:

  • The amount of money paid into the scheme;
  • How well the investment funds perform;
  • The annuity rate at the date of retirement;
    – An annuity rate is the factor used to convert the ‘pot of money’ into a pension.

Defined Benefit (Final Salary) Schemes

More commonly known as Final Salary schemes, employees build up an entitlement (or ‘promise’) to a pension for each year of service. This will typically be 1/60th or 1/80th of their final salary each year.

For example, an employee in a 60ths scheme with 20 years’ service and a final salary of £30,000 would have 20/60ths of £30,000 as a pension (£10,000 each year).

Final Salary schemes present a number of issues:

  • They carry a higher cost and greater risk than other types of scheme;
  • Employers are responsible for ensuring that enough money is available to pay the pensions of all retired members for as long as they live, plus any dependents’ pensions due as part of the scheme;
  • Recent legislative changes with heavier weight mean very few schemes are starting up
  • Running such a scheme can be difficult and time-consuming – they are mainly confined to large companies and the public sector.

Occupational Pensions Essentials

Both Money Purchase and Final Salary schemes may be contracted out of the State Second Pension(S2P).

You may also be able to ‘top up’ your occupational scheme by way of Additional Voluntary Contributions (AVCs). The majority of AVC schemes are on a money purchase basis. If the employer bears the cost of administration this method is also cost-effective to the employee.

In a salary-related AVC scheme, you may be able to choose to pay additional contributions and buy ‘Added Years’. This method allows you to increase the number of years’ service you have in your main scheme.The extra service will boost both the amount of pension that you will receive and your tax-free cash allowance, irrespective of when you started contributing.

If you are an employer and you have concerns over your Final Salary scheme, such as funding levels, trustee obligations or anything else, our specialists can help. We will review your scheme to ensure both employer and members’ needs continue to be met and identify areas that need attention.

Our expert advisory team are always available to answer your questions and assuage your concerns, providing transparent advice and informed insight into the intricacies of Occupational Pensions. You may contact TR Wealth on 02083717994 or email info@trwealth.co.uk