Occupational Pensions / Auto Enrolment

Occupational Pensions

How occupational pension schemes work

The employee doesn’t have to do anything to enrol — the employer makes all the arrangements. Every payday, a percentage of the employee’s pay is deducted automatically from their salary or wages and invested in the scheme. The employer also contributes to the scheme on the employee’s behalf as does the government in the form of tax relief.

Two types of scheme

In a ‘defined contribution scheme’, the employee’s retirement income is based on the contributions made, whereas in a defined benefit scheme, the employee’s pension income is based on his or her salary and length of service with the employer. Most occupational pension schemes are defined contribution schemes.

What happens if the employer goes out of business?

Most defined contribution schemes are managed by insurance companies not the employer, so employees’ pension pots should not be affected. If the scheme is a trust-based scheme, employees will still get their pensions, although not as much because the scheme’s running costs will be paid out of members’ pension pots rather than by the employer.

Auto Enrolment

Under a new law called ‘Automatic enrolment’, any employer (with at least one member of staff) must automatically enrol every employee between the age of 22 and State Pension age and earning in excess of £10,000 a year into a company-managed occupational pension scheme.

Automatic enrolment is being introduced gradually, via ‘staging’ dates, although all eligible employees should be enrolled in a workplace scheme by February 2018, at the latest.

Contribution costs

The minimum contribution for employers is 1% of the employee’s earnings, rising to 2% on 6 April 2018 and then 3% on 6 April 2019. Employees are obliged to contribute at least 1% of their earnings before tax, rising to 3% on 6 April 2018 and then 5% on 6 April 2019.

OCCUPATIONAL PENSION SCHEMES ARE REGULATED BY THE PENSIONS REGULATOR

A DEFINED CONTRIBUTION PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.



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