Choose the right pension scheme

Choosing an occupational pension scheme

An occupational pension scheme is set up by an employer to provide a pension for employees.

There are two main types: salary-related and money-purchase.

In salary-related schemes, employers take the risk that the invested money does not perform as expected - if this happens, they will probably need to top up the fund so the scheme can meet its liabilities. However, if the investment outperforms expectations, employers running salary-related schemes can sometimes take payment holidays. This can happen only where the Scheme Actuary permits it.

In money-purchase schemes, employees lose out if the fund doesn't perform well because the amount of pension payable depends on the size of the fund. However, a higher than expected investment performance in a money-purchase scheme will boost its assets and will help secure benefits for members on retirement.

In HM Revenue & Customs-approved occupational schemes, tax relief is available on:

• employees' contributions (income tax relief)
• employer's contributions (corporation tax relief)
• scheme investments (income and capital gains tax relief)

Some occupational schemes are set up to allow for the employee to contract out of (leave) the State Second Pension (formerly SERPS). This means that the employees who join this type of scheme will have their entitlement to the State Second Pension or SERPS reduced or removed completely. However, any State Second Pension or SERPS built up before joining the scheme will be preserved.

To compensate for giving up some or all of the State Second Pension, both the employer and employee pay a reduced rate of National Insurance contributions. Where the scheme is contracted out on a money purchase basis, HM Revenue & Customs pay an additional age-related rebate direct to the scheme for investment on behalf of the employee.

As with any type of scheme, it is important for employees to have the information they need to decide whether it is in their best interests to join it. For example, if they intend to work for the company only for a short time or intend to become self-emplyed at some later date, they may be better off with a personal pension or a stakeholder pension instead.

It is important to seek specialist legal advice to help set up a pension scheme. Once the scheme has been set up, the day-to-day running of it is done through scheme trustees or managers, or if it set up through an insurance company or other financial institution, by the managers or administrators of the scheme.

Subjects covered in this guide

• Introduction
• Benefits of having a workplace-based pension scheme
• Choosing an occupational pension scheme
• Choosing a group personal pension
• Choosing a stakeholder pension scheme
• Approved pension schemes for directors and owners
• Unapproved pension schemes for directors and owners
• Comparison of pension schemes
• Organisations that advise on pensions schemes
• Considerations when choosing a pension scheme
• Here's how I selected the best company pension scheme for my business