Know your legal obligations on pensions

Occupational pensions

An occupational pension scheme is set up by an employer to provide a pension for employees. Most schemes require financial contributions from both employer and employee but in some - mainly public service salary-related schemes - only the employer contributes.

Currently if an individual stops working for an employer, he or she can no longer remain an active member of the former employer's scheme. They may request that benefits built up in the scheme be transferred to a new scheme, provided the new scheme is prepared to accept the transfer.

There are two main types of occupational schemes:

Salary-related pension scheme
This is also known as a Defined Benefit scheme. The amount of pension is usually based on the individual's final earnings at or near retirement - or when they leave the company if this is before retirement - and how long they were in the scheme. Most salary-related schemes provide a tax-free lump sum on retirement and an income for life.

Money-purchase pension scheme
This is also known as a Defined Contribution scheme. At retirement, part of the fund can usually be taken as a tax-free lump sum, the balance being used to buy an annuity (a pension payable for life). The amount of pension depends mainly on the amount paid into the pension fund and how well it has been invested. The age at which the annuity is purchased, whether there are provisions for family members following a scheme member's death, and whether the pension is to increase on an annual basis, will all affect the amount of pension payable.

If you intend to set up a company pension scheme for your employees, you may wish to consider using the scheme to contract them out of the State Second Pension (formerly SERPS). See the page in this guide on contracting out of the State Second Pension and paying Additional Voluntary Contributions.

If you don't offer access to a company pension scheme, and have more than five employees, you have to provide access to a stakeholder scheme, unless exempt. See the page in this guide on stakeholder pensions.

Subjects covered in this guide

• Introduction
• Occupational pensions
• Personal pensions
• Stakeholder pensions
• Contracting out of the State Second Pension and paying Additional Voluntary Contributions
• Must I provide a stakeholder pension?
• Providing a stakeholder pension - key steps

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