Occupational Pensions Company Pension Schemes

Since October 2001 every company that employs more than five members of staff has been required by law to offer its workforce access to a pension scheme. Not all of these pension schemes qualify as occupational pensions many smaller companies merely offer their workforce the option of paying into a stakeholder pension and make no corporate contribution to the employees pension fund.

You are not legally obliged to join an employers occupational pension scheme. However most of the time if such a scheme is offered it makes sense to do so. Do remember that while your pension savings should be safe the only guarantee you have that your occupational pension will be honoured in full is the continued good health of the company you work for.

Savings in a company pension scheme are relatively secure but not 100 per cent guaranteed to be safe. However the Pension Protection Fund should ensure if your scheme collapses for whatever reason that you are not left without some kind of pension provision.

Among the reasons influencing your decision whether to join a company scheme the most important is the fact that your employer may make contributions on your behalf in addition to any sums deducted from your salary.

Your employers plan may also provide other benefits such as

• Life insurance cover while you are in employment
• A pension if you are forced to retire early due to ill health
• A pension for your dependants when you die
• An increase to your pension every year once you start receiving your pension
• Your employer may pay the administration costs of the plan

Your occupational pension will either be a defined benefit or a defined contribution scheme. A Defined Benefit DB plan promises you a certain amount of pension. This is typically a percentage of your final salary but may alternatively be based on an average salary over a set period of years. The amount will vary from company to company and will almost certainly relate to how long you have been employed.

Typically a plan may pay you 160th of your final salary for each year you have worked for that employer. So if you work with the same employer for 40 years when you retire you will be entitled to 4060 i.e. two thirds of your final salary plus any contributions you personally made.

However long service of this nature is the exception these days. Those of us who have worked for a number of different companies throughout our careers may end up being eligible for varying amounts from a number of pension plans unless we transfer the money from each plan into the next as we move around.

In a defined contribution money purchase plan your employer commits to making regular payments into your pension fund. This is normally a percentage of your salary. The fund will then grow over time. When you retire it will provide you with a pension. However you will not know exactly how much pension you will get when you retire as this depends upon how well the investments have performed.

The certainly is in how much your employer will pay not how much you will get. Here cash is invested regularly by your employer or by you in combination with your employer and on retirement you have a pot of money in your pension fund which can then be used to buy yourself an annuity an income for life. Money purchase schemes are different to final salary schemes from the employees point of view because he or she has no guarantee of what level of pension will actually be on offer in retirement.

2009-02-17 00:00:00 © Moneyextra.com