Do you know and understand what your pension has to offer?

As much as we all like to think it will happen, you can’t keep relying on that lottery win to see you through your retirement!

Not only are some of us not saving for our future but many of us are oblivious to what our pension has to offer. There are three types of Occupational Pension Schemes:

• Defined Benefit Scheme;
• Defined Contribution Scheme; and
• A combination of the above two schemes known as a Hybrid Scheme.

Defined Benefit Schemes

In a Defined Benefit (“DB”) Scheme, there is a fixed benefit that the member will, at retirement, receive from the scheme. The most common type of DB scheme is a final salary scheme. In a final salary scheme, the member’s pension is a percentage of pensionable salary for each year of service that they have been contributing to the scheme. A DB scheme could also provide a pension based on the average salary of the member over their working life. Known as a career-average revalued-earnings (CARE) scheme. Death-benefit schemes providing a multiple of the member’s salary on death are also DB schemes.

Defined Contribution Schemes

In a Defined Contribution Scheme, the eventual benefits are unknown until retirement. A specified level of contributions is payable to the scheme from the employer and (normally) the employee. The contributions invested, and a notional account of these are kept for each member’s investments in the scheme. On retirement, the total of the contributions paid and the investment returns on these are available to the member to use as they wish. This is subject to restrictions in legislation.

Auto-enrolment and NEST

Auto-enrolment employers can either use a Defined Benefit or a Defined Contribution scheme. Alternatively, they can subscribe to the government-established NEST scheme.

Auto-enrolment requires a mandatory minimum employer pension contribution on behalf of those employees who are a member of their employer’s workplace pension scheme. Employer and employee needs to pay a minimum amount into the scheme. This is set at 8% of staff member earnings. The employer must pay at least 3% of this (although can choose to pay more) and the employee pays the 5% balance. 

The minimum contribution requirements do not apply in the case of an employer that sponsors a Defined Benefit scheme. The employer must ensure the scheme provides benefits that meet a minimum statutory standard.