Occupational Schemes

Occupational pensions are pensions provided by your employer. There are two main types of occupational scheme:

​1.Defined Benefit (Final Salary) Schemes: 
Schemes set up on a defined benefits basis are commonly referred to as final salary schemes. Under this type of scheme the benefits received are determined by the member’s number of year’s pensionable service and their salary at or near retirement. However, not all defined benefit schemes are ‘final salary’ schemes – some are ‘average salary’ schemes where the benefits are instead based on the member’s average salary over a specified period.

Either way, a defined benefits scheme will pay the member a fraction of their pensionable salary for each year’s service.  Defined benefit schemes will either be contributory or non-contributory.  In the case of a contributory scheme, the employee is required to make contributions to the scheme in addition to the contributions made the employer.

The employee can usually choose to make additional contributions to the scheme this can be done via a personal plan or an Additional Voluntary Contribution (AVC) arrangement. An AVC will provide either additional defined benefits or build up a separate money purchase pot.

2.     Defined Contribution (Money Purchase) schemes:
Occupational Schemes set up on a defined contribution basis are commonly referred to as money purchase schemes. Under this type of scheme the contributions paid by the employer and employee are ‘defined’ and invested in a fund which benefits from tax free growth (apart from the 10% tax on UK dividends).

Like a final salary scheme, it may or may not be a condition of membership that the employee has to make individual contributions to the scheme.

In a money purchase scheme the return on your investment is not guaranteed and the eventual benefits payable will depend on the size of the pension fund created by the contributions made.  At retirement part of the fund, up to 25%, can be taken as a tax free cash sum with the balance being used to purchase a pension which would be taxed as earned income.

Workplace Pension Reforms / Auto enrolment
As a result of Government reforms, between 2012 and 2018 all employers will have to provide a qualifying workplace pension, automatically enrol all of their employees who meet certain criteria and contribute a minimum of 3% of qualifying earnings (ie. earnings between a lower and upper limit) or make an equivalent contribution.

Employers are being phased in to their new duties between October 2012 and early 2018 as are the minimum employer contributions which will by 1st October 2018 have risen to a minimum of 3% of qualifying earnings with a minimum total employer and employee contribution of 8% of qualifying earnings.  It is therefore important that the recommendations made today are reviewed regularly in the light of changing circumstances/legislation.

National Employment Savings Trust (NEST)
NEST is the workplace pension scheme set up by government that started in 2012 and is designed to meet the needs of low-to-moderate earners and their employers. NEST is one of the schemes employers can use to fulfil new duties under the workplace pension reforms.  NEST is intended to be a low cost, easy to use, online pension scheme open to any employer.