Joining your employer’s scheme

Occupational pension schemes vary from company to company. Your scheme is likely to be one of two general types, Final Salary related or Defined Contribution Scheme.


Occupational pension schemes are pension arrangements that employers set up to provide retirement income for their employees. The employer sponsors the scheme and a board of trustees ensures that benefits are paid.

Public-sector occupational pension schemes are different in that they are established by an Act of Parliament, which lays down the scheme rules.

Final Salary Schemes
Final Salary Schemes are also known as Defined Benefit Schemes. With these, the amount you receive on retirement depends on your salary when you leave the company or retire, and the length of time you have been a member of the scheme.

It is usually paid at the rate of one-sixtieth of final salary multiplied by the number of years of scheme membership (the accrual rate). So someone who has been a scheme member for 40 years would retire on two-thirds of final salary.

Your pension will depend on your final earnings and not on stock market conditions over your working life. But these schemes are becoming rarer, and many companies are changing their plans from Final Salary to Defined Contribution Schemes.

When you leave a company, you normally have the choice of leaving the money where it is to claim on retirement or transferring it to a new company’s occupational scheme or to a Personal Pension Plan. And if you leave a firm within two years of joining its pension you can have your own contributions, minus tax relief, returned to you, if the scheme’s rules allow.

Defined Contribution Schemes
Defined Contribution Schemes are also known as Money Purchase Schemes. With these you know what you are contributing towards your pension, but what you receive when you retire depends on the performance of your pension fund(s) over the years and on economic conditions when you actually retire.

On retirement, the money would normally be used to purchase an annuity (a regular income for life) which pays an income until you die. You do not have to accept the annuity offered by the company running your scheme. You have the right to choose the open market option, in other words, you can shop around for the best annuity rates.

Joining an occupational pension scheme
Your employer is required to offer you the chance to join a pension scheme. If you work part-time and your employer has an occupational pension scheme, you will usually be allowed to join it.

Before you join an occupational pension scheme, you should check:
- how much you will have to pay
- what contribution your employer is going to make
You receive ‘tax relief’ on the money you pay into your pension scheme. This means you pay less tax because your employer takes the pension contributions from your pay before deducting tax (but not National Insurance Contributions).

Contributions you can make
HM Revenue & Customs (HMRC) sets a limit on the contributions you can make into occupational pension schemes. For Defined Contribution Schemes, the limit is on how much can be paid in total in a tax year. For Final Salary Schemes, the limit is on the value put on the increase in your pension gained during the tax year.

Where your pension exceeds the Annual Allowance, after carrying over any unused allowance amount, you will be liable to pay a tax charge at your marginal tax rate.

There is also a limit on the value of retirement benefits that you can draw from an approved pension scheme before tax penalties apply. This limit is called the Lifetime Allowance. The Lifetime Allowance is £1.8m for the 2011/12 tax year. When you start to draw your pension, HMRC will apply a recovery charge to the value of retirement benefits that exceed the Lifetime Allowance. The amount will depend on how you pay the excess.

Increasing your benefits
Occupational pension schemes usually require you to make a regular contribution based on a percentage of your salary. You may also be able to increase your benefits by making Additional Voluntary Contributions (AVCs).

Money Purchase AVC – One of the ways you can do this is by paying into an Additional Voluntary Contribution (AVC) arrangement run by your scheme trustees. The majority of these are money purchase, which means that your contributions are invested, usually with an insurance company, to build up a fund. An AVC arrangement run through your employer’s pension scheme is known as an ‘in-house’ AVC scheme. The employer normally bears the cost of administration of this scheme and so costs tend to be lower than topping up pensions through other means.

Added Years – If your scheme allows you to buy added years, this will enable you to increase the number of years of service you have in your main scheme. The extra service will increase both the amount of pension that you will receive and your tax-free cash allowance, irrespective of when you started contributing. How much you pay as voluntary contributions will be worked out by your main scheme. The cost will depend on how many years you want to buy and certain factors such as your age and salary for pension purposes.

Free-Standing AVC (FSAVC) – It may be possible for you to pay into a FSAVC arrangement. This is similar to a money purchase AVC but is provided by external providers. Since 6 April 2006, it has no longer been compulsory for occupational pension scheme trustees to offer an AVC facility to its members.

If you joined your occupational pension scheme during or after 1989, you were restricted on how much you could put into the scheme. However, following changes to pension rules in April 2006, you can now save as much as you like into any number and type of pensions. You are able to do this at any age. You also receive tax relief on contributions of up to 100 per cent of your earnings (salary and other income) each year, subject to an upper ‘Annual Allowance’.

Tax charges
Savings above the Annual Allowance and a separate Lifetime Allowance will be subject to tax charges. These allowances will be restricted if you become unemployed and wish to continue to pay into your pension scheme.

Having an occupational pension does not affect your Additional State Pension entitlements. But you will lose some or all of your Additional State Pension if your company pension scheme is contracted out.

Your pension scheme administrator can provide you with an estimate of:
- how much you will receive when you retire
- the value of any survivor’s benefits that may become payable
- how much you will receive if you have to retire early due to ill health

Up until April 2006 you could not draw your pension from an occupational scheme and continue to work for the same employer. Following the 6 April 2006 changes, you are now able to do this, providing your particular scheme allows you to. Also, if you leave your employer, it’s important to find out what your occupational pension scheme options are.

All employers currently with five or more employees have to offer access to a pension scheme. If your employer doesn’t offer a pension, there are lots of pension providers for you to choose from and you should seek professional financial advice so that you can make an informed decision about which pension option is right for you.

From 2012 employers will need to automatically enrol