Tony Revans Financial Planning

Company Pensions

If the opportunity to join a company pension scheme presents itself, it's usually more cost efficient to grab it. Many occupational schemes will top up contributions, as part of the benefits package, and the employer typically picks up some, or all, of the charges.

If your company employs five or more staff, they are legally required to arrange access to a pension plan for employees. In the simplest form, that could be selecting a Group personal pension, or stakeholder scheme, giving employees the opportunity to start contributing. Alternatively, they may set up occupational schemes, of which there are two types – final salary (less common today) and money purchase schemes.

The number of employees often influences the scheme chosen by companies. If your company offers you a pension, it will likely be one of three types:

Group Personal Pension / Stakeholder

A group personal pension, or group Stakeholder pension is as it sounds - a group of individual pension policies administered together.

It works exactly as if you'd selected your own personal pension plan. You own it, and if you move jobs, you can take it with you. But, they can be better value. Because your employer may be bringing bulk business to the provider, they can often negotiate a better deal than if you approached the provider directly.

Your employer will take your chosen contributions directly out of your wages and pay it straight into the policy. If your employer chooses to make a contribution, even better. Years on, these top-ups will increase the value of your overall pension pot, making you more financially comfortable. 

Defined Contribution / Money Purchase Occupational Scheme

On a practical level these work like individual pension plans. You contribute a percentage of your salary  and this, combined with any employer contribution, is used to provide an income when you retire.

The difference is you do not own a pension policy yourself. Your money, with other employees is put into a large pension fund pot and your portion is earmarked for when you retire. A fund manager will be in charge of investing it. What you get out at the end will depend upon the performance of the investments selected. If you leave your employer, you will stop paying into the scheme. Over a lifetime of working, you may have several company pension schemes, which mature at retirement age.

With company schemes, you can still select the type of funds you want your portion invested in, although these are likely to be more limited than a savings investment. Overall, the charges may be lower, because your employer will often contribute towards the administration costs.

Defined Benefit / Final Salary Occupational Scheme

With Defined Benefit, or Final Salary schemes as their commonly known, the amount you receive when you retire is based upon the years of service and your final salary when you leave the company or retire. The calculation is normally one-sixteenth of your final salary, multiplied by the number of years you were in the scheme for.

The security element for employees is that you aren't depending on stock market conditions. The company is responsible for selecting fund investments. If the fund falls short of the amount needed to pay you your retirement income, it is up to the employer to make up the shortfall.

Poor stock market performance over the past five to ten years has highlighted to employers how much they might have to pay in these circumstances, so many have transferred over to Money Purchase occupational pensions.

Specialist Plans

There are other, more specialised, types of company pension policy available. Seek financial advice to find out the most suitable option for you.

Save or switch

When you leave any occupational scheme, you usually have the choice of leaving your money in the scheme, or transferring it over into another occupational or personal pension plan. If you leave within two years of starting a scheme, you can have all your contributions, minus tax relief, returned to you as a lump sum. Before deciding, you can request an estimate of the transfer value that will be available. It's vital to seek advice from a specialist before making any decision.

Individual pension plans