Company pensions are an invaluable part of employees' remuneration packages. They are a central incentive and motivation to staff and an important part, therefore, for successful retention and recruitment. This importance is recognised by the Independent Financial Advisers who help and advise employees and companies alike on the benefits of a company or occupational pension scheme.
Types of occupational pension
If the company offers an occupational pension scheme, this generally means that it also makes contributions to its employees' pensions and may also include benefits to the spouse, partner or dependents of the employee in the event of their death.
Although the particular scheme in place in any one company will vary from workplace to workplace, it will fall into one of two broad categories:
- Final salary schemes - as the name suggests, this type of scheme bases the pension on the salary the employee is earning in the final years of his employment and the number of years he or she has worked for that employer;
- Money purchase schemes - individual employees receive pension benefits based on the amount of money that has been paid into a pension fund and the performance of the investments in that fund.
Who pays?
Company pensions generally rely on regular monthly contributions being made by both employee and employer, based on a percentage of the employee's salary. For both employee and employer, those contributions are made free of any tax deductions.
Pension payment
The employee's retirement age - the age at which he or she can start to draw the pension - will be set out in the rules of the particular pension scheme. Details about qualification, together with estimates of the pension benefits likely to be paid on retirement, will be made available by the administrator of the pension scheme.
Changing jobs
If the employee leaves the company's employment, it is generally not possible for him or her to continue contributions to the same occupational pension scheme, although the benefits are preserved and the former employee becomes what is known as a "deferred member" - the benefits are deferred until the employee's qualifying retirement age under the rules of the scheme.
In the case of a final salary scheme, the deferred pension benefits are re-valued on a regular (generally annual) basis, with the intention of their being kept broadly in line with inflation. Some of the benefits of such schemes - "death in service", for example - are unlikely to continue to be available, however, if the employee has left the company's employment and is a deferred member.
In the case of a money purchase pension scheme, the combined employee and employer contributions remain invested in the pension fund. Annual statements on the current performance of the fund and forecasts of its future performance will continue to be sent to the former employee and deferred member.
Pension transfers
Employees have the option of transferring their accumulated pension from the occupational scheme into a personal pension plan or, if they have changed jobs, into another company scheme.
The implications and costs of doing this, however, are by no means straight forward and anyone thinking of transferring from an occupational pension scheme, or anyone with any questions about company pensions in general, would best seek independent financial advice.
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