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Occupational Pensions

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

Although the employer is responsible for sponsoring the scheme, it is actually run by a Board of Trustees, who with the exception of public sector schemes is responsible for paying benefits.

Defined Contribution 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 dependant 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 Schemes

More commonly known as Final Salary schemes, employees build up an entitlement or ‘promise’ to a pension for each year of service. Typically, this will 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 which is £10,000 each year.

The key point with Final Salary schemes is that 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 dependants’ pensions due as part of the scheme.

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 and 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 to buy 'Added Years'. This method allows you to increase the number of years of 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.

The increasing weight of legislation has meant that very few Final Salary schemes are starting up. They are becoming confined mainly to the largest companies and the public sector.Running a final salary scheme can be an onerous and time consuming task particularly with recent increases in legislation.

If as an employer you have concerns over your Final Salary scheme, eg, funding levels, trustees obligations etc or if you wish to review the scheme to ensure both employer and members needs continue to be met, Goldberg Steele Associates can help.

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