What is a company pension?
A company pension is often known as an occupational pension. Employer private pension schemes are provided by your employer for you to join. Occuptional pensions are usually set up and administered by a company or through a third party on the company’s behalf for their employees.
How does a company pension work?
It may either be contributory with employees making pre-taxed payments direct from their salaries or non-contributory where the company makes the payments on their employees’ behalf. In contributory schemes, companies will commonly match the employees’ contribution towards their pension fund, which means the employees will double the amount of money being put into their pensions through such a pension arrangement.
There are no other pension plans that can compete with the benefits of a company pension scheme. This explains the reason why IFAs recommend workers to join company schemes as soon as they can.
However, you need to check to see how much you will have to pay and what contribution your employer is going to make towards your pension. Your personal contribution is normally based on a percentage of your salary and it is also possible for you to boost these benefits by making additional voluntary contributions towards your pension.
When can I receive the full benefits of my company pension?
It depends on your employer to set out the rules in your company pension scheme, which details out the retirement age with your company. There could be situations within which you would have contributed to a company pension for years and you would leave the company for another job. In this case, you can no longer pay into this pension scheme, but consolidate the money with your new company pension scheme. You should ask an independent FSA-certificated advisor for advice.
Do I have to take up a pension with my company?
You are not required to take a pension in order to be employed by a company. Currently employees cannot be compelled to join an employer-sponsored pension, but they cannot be prevented from doing so either.
Should I have a company pension?
When you are starting a new job, your employer is legally required to offer you the choice of joining a pension scheme towards which both you and your employer will make a contribution. Even if you are only working part-time, you will be given the chance to join such a scheme. Company pension schemes may vary from company to company in arrangements, but they are likely to fall into one of two general types- a salary-related pension and a money-purchase pension.
Salary-related pensions are otherwise referred to as “defined benefit pension” or “final salary pension” schemes. If you have a salary-related scheme, the amount of money you will get is based on your salary and the number of years you have been in the scheme.
Risks and Rewards with a salary-related pension
A salary-related pension is seen as the best type of pension one can ever get. They guarantee to pay a retirement income based on a percentage of your salary every year for the rest of your life. However, the final salary schemes have hit the headlines in the news over the last few years. As the stock market condition is bad which leads to a devaluation of the pension fund, a big pension deficit occurs and this forces many employers to wind-up their final salary schemes. As a result, the employees who have not taken retirement yet are left with nothing for their pensions.
Money Purchase Pension
If you have a money purchase scheme, the amount of money you will get is based on how much has been paid into your pension fund and how well the pension money pot has been invested. For example, your pension fund may well be invested in the stock market to yield a financial return.
Risks and Rewards with a money purchase pension
There is no 100% risk-free investment. The risk associated with the money purchase pension scheme will be borne by you, not your employer. This causes a big problem for you to decide when to take your retirement. If the stock market is experiencing a downturn, you will receive less than expected for your retirement.
However, after you will have taken your retirement, you can use the money pot in your money purchase pension scheme to buy an annuity which pays you regular income for the rest of your life.
Group Personal Pensions and Group Stakeholder Pensions
Since April 2001 all companies with five or more permanent employees that do not have an existing pension arrangement must establish either a group personal pension (GPP) or Group Stakeholder pension.
If your employer offers a Group Personal or Stakeholder Pension, you’ll build up your own personal pension, but your employer usually collects your contribution from your wages and passes them on to the pension company. This is not legally defined as an occupational pension, but when this type of scheme is arranged through an employer it may have lower charges, and the employer may make a contribution.
If you leave your employer, all the contributions accrued to that date (including those made by you and your employer) will belong to you. The contributions can be left in the group scheme or transferred to another provider.