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Pension Awareness Day has come around again reminding us all that time is marching on and we should all have a mind on how we plan to live when we retire.
Since the introduction of the auto-enrolment scheme, those who are employed are at least saving something for our future
What pension schemes are there?
There are three types of Occupational Pension Schemes:
- Defined Benefit Scheme;
- Defined Contribution Scheme; and
- A Hybrid Scheme – a combination of the above two schemes.
Defined Benefit Schemes
In a Defined Benefit Scheme (DB), the employee receives a fixed benefit on retirement. A final salary scheme is the most common type of DB scheme. The member’s pension is a percentage of pensionable salary for each year of service over their working life.
Defined Contribution Schemes
In a Defined Contribution Scheme (DC), the eventual benefits are not known until the employee retires. An agreed level of contributions is paid into the scheme from both the employer and employee are invested. On employee retirement, the total contributions paid, and investment returns are available to the employee to use as they prefer.
Auto-enrolment and NEST
Auto-enrolment employers have a choice on whether to use a Defined Benefit or Defined Contribution scheme or subscribe to the Government NEST scheme.
To be enrolled on this kind of pension scheme the employee must be aged between 22 and the state pension age, earn at least £10,000 per year and work in the UK. The minimum amount of contributions from salary towards the pension is 8% made up from:
- from the employer 3%
- from the employee 5%
In some schemes, the employer has the option to pay more than the 3% legal minimum. In this case, the employee can pay less if enough is paid to meet the total minimum contribution.
If an employer provides a Defined Benefit scheme, then the minimum contribution requirements do not apply.
Other benefits to a pension
The main benefit is the right to receive a pension payable at normal retirement age but there are other pension benefits.
Retirement pension increases
The law states that once a pension is in payment it must increase by a minimum amount each year to allow for inflation.
Early retirement pensions
Many pensions have the option to take early payment but this means that the recipient will be receiving their pension for longer, therefore the monthly amount received will be lower.
Ill-health early retirement pensions
Many schemes offer pensions for those who are unable to work because of ill-health. The requirements that members must meet vary between schemes ie;
- whether they need to be too ill to do their job or to ever work again; and
- whether they only receive the benefit of their accrued service or have an estimate of future service included.
Spouses’ or dependants’ pensions
Schemes offering spouse’s pensions offer half the amount that the pension recipient was receiving immediately prior to his/her death. Some schemes offer pensions to the children of a deceased member, usually until they have completed full-time education.
Protection for early leavers
An employee with over two years’ pensionable service with an occupational scheme benefit from statutory protection. They become a deferred member in the scheme and receive a preserved pension held in the scheme until they choose to retire.
Employees who leave pensionable service with less than two years’ service in a DB scheme have a choice of a right to receive either a cash transfer sum or a short-service refund lump sum (subject to 20% tax).
Understand your pension
Employers and their employees should be fully conversant with the type of pension scheme they have, and the benefits offered.
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Disclaimer: Information provided by Kidwells Accountancy on our website is for informational purposes only. It is provided in good faith but we make no guarantee of any kind regarding the accuracy, reliability, or completeness of any information on our site. We always recommend businesses seek independent legal and financial advice before working with us or acting on any information on our website.