Enrolling in a company pension scheme is a good way to prepare for your future, particularly if your scheme allows for your employer to contribute to it.
Types of company pension
While each company is likely to have a different pension scheme in place, there are two main kinds of company pension which are ‘salary related’ or ‘money purchase’ schemes.
Salary related schemes
In a salary related scheme, the amount of pension that you get is based on your salary and the number of years that you worked for the company.
Money purchase scheme
In a money purchase scheme, the amount of pension that you get is based on the amount of the contributions that you and your employer have made into your pension and how well this money was invested. When you want to claim your pension, the fund that you have saved is used to buy an annuity, which provides you with a lifetime income.
Contributing to a company pension
Before you decide to join your company pension scheme you should find out how much you will have to pay into it and the contributions that your employer will make. Most company pensions require you to make contributions to them based on a percentage of your salary. You may also be able to get extra benefits if you make additional voluntary contributions into your scheme. One of the advantages of a company pension scheme is that you pay less tax, as your employer takes your pension contributions straight from your earnings before they deduct tax. You still have to pay national insurance contributions however, as these will go toward your eligibility for a state pension.
Changes to pension rules since 2006
After 1989, if you were a member of a company pension scheme, you would have been restricted on the amount that you could pay into it. From April 2006 the rules changed meaning that you can put however much money you like into any number of different pension schemes. There is also no age limit; you can start saving for your pension at any time. You can also get tax relief on all your contributions of up to 100% of your earnings as long as you stay under the annual allowance.
Any savings that you make above the annual allowance and your lifetime allowance will be taxable. Allowances will be restricted if you become unemployed and wish to continue to contribute toward your pension.
You company pension may contract you out of building up an additional state pension. You should talk to your pensions administrator to find out if this affects you. You have the option to opt out of this if you wish.
Claiming your company pension
Your pension scheme administrator will be able to tell you at what age you will be able to start claiming your pension. Different pension schemes will have different rules about when you can start to claim.
Getting a company pension forecast
If you require it, your pension scheme administrator should also be able to provide you with a pensions forecast which will detail:
- how much pension you are likely to get when you retire
- how much survivor’s benefits will be payable should you die
- what you may get if you need to retire early because you are ill.
Most company pension schemes will now allow you to claim your pension and continue to work at the same time.
What if there is not a company pension scheme where you work?
By law your employer should offer you access to some kind of pension plan.
Additional Voluntary Contributions (AVCs)
The majority of company pension schemes are made up of contributions made by you and your employer. Despite this you may want to increase the value of your pension to give you and your family added security or you have started saving your pension at a late age.
A way in which you can do this is by making additional voluntary contributions (AVCs) into your pension fund. The extra contributions are taken directly from your salary.
Advantages of making AVCs
There are several advantages to making AVCs to your company pension scheme:
- Your administration charges are likely to be lower than if you decided to start a whole new personal pension scheme to make your extra contributions to.
- You should be able to stop your extra contributions or vary the amount that you pay.
- You will get tax relief on your contributions up to a certain amount each year.
Since April 2006 some companies no longer offer the option of making AVCs as there are now a wider range of options for making extra contributions to your company pension fund.
How AVCs are used by your pension fund
The type of company pension scheme that you are in will have an effect on how your AVCs will work for you.
Final salary (defined benefit) scheme
If you are a member of a final salary scheme, the basic amount of pension that you will get is based on your final year’s salary and the number of years that you worked for your employer. In this type of scheme, the way your AVCs work can vary, they may contribute toward extra years or may go towards other benefits. You should get in contact with your pensions administrator to find out about your specific scheme.
Money purchase schemes
When you decide to claim your pension, the fund that you have built up, including all your AVCs, will go towards buying an annuity which will provide you with an income for life.
If you die before you claim your pension, the majority of company pension schemes will repay your AVCs along with any interest that they have earned. You should check with your pensions administrator to find out the rules of your scheme.
Free standing AVCs
A free standing AVC (FSAVC) is different from a normal AVC in that you have to arrange them and pay them into a scheme run by a financial institution, such as a bank. The advantages of FSAVCs are that if you decide to change jobs or are made redundant, you can continue to pay into the scheme when you have a new employer. FSAVCs also offer a greater range of investment options. The downside to FSAVCs is that you will have to pay larger administration costs.
If a scheme can’t pay your pension
Money purchase schemes
The amount of pension that you receive is determined by the amount of contributions that have been made by you and your employer into your fund. It will then be based on how well the money was then invested.
Each member of a money purchase scheme has a separate pension fund. While the amount that you may receive may decrease slightly if the investment was not successful, the only way that a money purchase scheme could run out of money is through fraud of theft. The Pensions Protection Fund may be able to compensate you if this happens.
Final salary schemes
The amount that you receive from a final salary scheme is based on your salary and the number of years that you have been a member of the scheme. Every person who is a member of a final salary scheme will be paid from one pension fund.
In a final salary scheme, money may run out if the money that your company needs to pay out is more than the amount that they have invested. If this happens, the scheme is likely to have a compensation system put in place to help its members.
What will happen if your company becomes insolvent?
A pension fund cannot be put toward bailing out a company which has gone insolvent. There is a chance that your company may owe their pension scheme providers, who are likely to have ‘unsecured creditor’ status. There are creditors who fall below unsecured status.
With final salary pension schemes, if a company goes bankrupt, they are now classed as a debt to the company. This offers more protection to people who are members of final salary schemes, as it allows the trustees of the pension fund to chase the employer for any shortfall in the pension fund as if it were a credited debt.
If the shortfall is not returned, you will receive a smaller pension. You may be able to get compensation from The Pension Protection Fund or the Financial Assistance Scheme.
The Pension Protection Fund (PPF)
If you are a member of a final salary scheme you will be protected by The Pension Protection Fund. They will pay you compensation based on the amount that you have lost out on when your company went into administration.
If your scheme meets the PPF regulations they will provide you with a regular payment. If you reached retirement age before your company went insolvent, you will get 100% of your pension in compensation. If you are under retirement age then you will receive up to 90% of your total pension fund in compensation. This is subject to the maximum of £26,935.70 per year.
If your pension fund was affected negatively by fraud, the Fraud Compensation Fund may be able to provide you with compensation.
The Financial Assistance Scheme (FAS)
If you are a member of a defined benefit scheme and you have suffered a loss on your pension due to your company winding up after the January 1997 and the introduction of the PPF, you may be eligible for help from the FAS if:
- Your scheme was underfunded
- Your employer is insolvent, no longer exists, or has gone into an agreement with the trustees of your scheme to avoid becoming insolvent
- Your scheme was wound up because it could not afford to pay out even if your employer continued to trade.
If you fit these and other specifications, the FAS may be able to pay you up to 90% of your expected pension in compensation.
Closing a final salary scheme
Trustees are in charge of making sure that your final salary scheme does not run out of money. If it looks as if this will happen, they can choose to do one of the following:
- Close the scheme to new members, which means existing members can continue to make contributions to the scheme and will get a pension when they retire
- Freeze the scheme so that it is completely closed and even existing members are no longer able to make contributions.
Your employer or the trustees of your pension scheme may also decide to wind up the scheme. This means that they will use the assets for its member’s benefits. If the company remains in business they will have to provide some kind of pension for its employees.
Closed pension schemes
Final salary company pensions are based on your salary and the number of years that you have worked for your employer and been a member of the scheme. Your final salary pension may be frozen or closed if it runs out of money.
Your company pension scheme will run out of money if the investments it made are worth less than the amount that it has to pay out now or the amount that it is going to have to pay out in the future, including all the employees’ contributions so far.
The trustees of your pension scheme are in charge of making sure that your pension does not run out of money. If it does run out of money, they can choose to do one of the following:
- Close the scheme to new members, which means existing members can continue to make contributions to the scheme and will get a pension when they retire.
- Freeze the scheme so that it is completely closed and even existing members are no longer able to make contributions and their existing benefits will be affected.
Your company pension is closed to new members
If you are member of a company scheme that has become closed to new members, it is unlikely to affect your pension.
If you are new to the company you can ask your employer if they provide access to another scheme, such as:
- a company pension scheme based on what you earn
- a group personal pension plan
- a stakeholder pension.
If your employer offers group personal pension plans or stakeholder pensions, they will not be required to make contributions towards your pension fund. If your employer offers any of these pensions, it is likely that you will receive less benefits than those who are members of the final salary scheme. You should talk to your pension administrator to find out more.
Your company pension is frozen
If the trustees of your pension scheme decide to freeze it, new members will not be able to join and you will no longer be able to contribute into the pension fund. You should be told of the benefits that you have already built up and given access to another company pension scheme.
Why company pensions are wound up
Your pension could have been wound up because:
- the company has gone out of business
- the company is being taken over by another company or they are being merged
- your employer has stopped contributing to the company pension scheme
- the Pensions Regulator has ordered the scheme to be wound up.
If your scheme is wound up it means it will cease to exist. You should be informed as to why the scheme is being wound up and what will happen to your money.
Your pension after you die
If you die within 5 years of claiming your pension, you are likely to be covered by a guarantee, which should pay the person you have nominated the balance of the guarantee period. Some schemes also offer, in the event of your death, to transfer your pension to your husband, wife or civil partner and give them an income for the rest of their life.
Certain schemes also offer this to couples who are not married, but this is not the norm, so if this is an option that you are interested in, you should seek financial advice about which scheme would suit your circumstances.
Salary related schemes
You should talk to your pension administrator to find out what the rules are surrounding a pension for your partner if you die. Most salary related schemes will provide about half to two thirds of your pension to your surviving partner.
Money purchase schemes
In a money purchase scheme, you can request the amount of your pension fund that will be given to your surviving partner when you die. The maximum for this is two-thirds of what would have been provided for you if you claimed your pension.
If you die after you retire and there is no guarantee period
The amount of pension that will be payable to a surviving partner will depend on what you agreed on when you retired if there is no guarantee in your pension scheme. When you retire you will be asked if you wish to provide a survivor’s pension if you die. If you choose to provide a survivor’s pension, it may affect the amount of pension you will receive. You should get in contact with your company pension administrator to find out more about rules on survivor’s pensions in your scheme.
If you die before you retire
If you die before you retire, what happens to your pension fund will depend on the rules of your scheme. You should talk to your pension administrator to find out what will happen in these circumstances.
Expression of wish form
When you sign up for your company pension, you will be asked to fill in an ‘expression of wish’ form. This will detail who you wish any lump sums to be paid out to in the event of your death. You should make sure that you keep the form up to date in case your circumstances change.
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