Occupational pension scheme
Set up by your employer to provide retirement income
Some employers offer their employees an occupational pension scheme. You may or may not have to contribute and the employer is under no obligation
to offer
you membership (however, with auto-enrolment they will be obligated to offer you a work place pension).
Occupational pension schemes can be arranged in a number of ways with the two most common listed below,-
- Defined benefit - This is the most favourable to the employee. The employee
will know how much pension they will receive as it is based on a percentage of their employment income.
The employer takes on all the investment
risk associated with the pension fund growth. Whatever the investment performance of the pension fund they are
contracted to provide the agreed pension.
- Defined contribution - The employee will know how much they have to contribute to the pension as a
regular salary sacrfice. These pensions are also referred to as money purchase as at retirement the pension pot is usually used to purchase
an annuity which will provide their pension. The size of the pension pot will depend on the contributions made
and the fund performance. The size of the pension will depend on annuity rates at time of purchase. The investment risk lays with the employee.
Defined benefit schemes are becoming less common due to the high investment risk bourne by the employer and many
existing schemes have stopped taking on new members.
Defined contribution schemes carry far less risk for the employer but means they are able to contribute to the pension fund without fear of later
mounting liabilities.