Company Schemes
There are two main types of company scheme (or occupational pension scheme):
- Final Salary – sometimes called defined benefits
- Money Purchase – otherwise known as defined contributions
Final Salary schemes calculate your pension from the number of years you have been in the scheme, and a fraction of your earnings in your final year of employment. For example if you earned £36,000 in your final year after 20 years of service and the fraction was 1/60th the pension would be £12,000. This would normally be on top of the state pension. Final salary pensions usually increase in line with inflation but might be limited to a maximum percentage increase each year.
A Money Purchase Scheme is where the company deducts money from your salary and this is invested in a pension on your behalf. The amount of the pension received on retirement will depend on the value of the pension fund and the cost of a lifetime annuity on retirement. An annuity is where you use capital to purchase an income. Types of money purchase schemes include
Small Self-Administered Schemes
a company scheme where the members are usually all company directors or key staff.
Executive Pension Schemes
designed especially for directors, senior executives and people who own their own businesses.
Group Pensions
low cost personal pension plans bought by groups of employees arranged through their employer.
Your employer may make a contribution to your occupational pension scheme in addition to deducting a percentage of your salary and paying it into the scheme. You may make extra contributions to your occupational scheme to boost your pension provision up to a maximum of the annual allowance. Tax relief is available on pension contributions of up to 100% of your taxable earnings. (You may contribute more than your taxable earnings but no tax relief will be given on payments above that amount).
