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Company Pension Scheme FAQ

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Company Pensions...

We hope you find the information on the Pension Transfer Experts website helpful as you seek to secure your retirement through your pension investment. Our experience has taught us that sometimes it is best to address a topic by way of the frequently asked questions form. Such is the case with company pensions. There is so much to know and understand about investing in a company plan that it can be difficult to encapsulate it into a traditional article while still being informative enough to answer basic questions.

In light of that, we have put together a company pension scheme FAQ guide for your convenience. We hope the following questions and answers provide the information you need to adequately understand how company pensions work.

1. What is a company pension?

A company pension is a pension scheme offered by an employer to its employees. It can be offered as a defined benefit or defined contribution plan, depending on the preferences of the employer. Most company pensions are established through insurance companies, banks, or specialist pension providers by creating a legally binding contract between the employer and the provider. Individual employees are regarded as pension members.

2. Who contributes to a company pension?

This question is one of the most commonly asked company pension FAQs. The answer is threefold: you, your employer, and the government. Any pension scheme you participate in, whether it is a company pension or otherwise, requires contributions from you. Your employer will also contribute if you qualify under either auto-enrolment or the government's opt-in rule. Finally, the government also contributes by way of tax relief.

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3. What happens to the money I contribute

Every company pension is operated and controlled by a pension administrator. In the case of defined contribution pensions, it is the administrator's responsibility to invest pension funds in order to generate a financial return. That means your money is combined with that of all other pension members and then invested cooperatively.

In a defined benefit scheme, the money you contribute may or may not be invested. It depends on whether the scheme is funded or unfunded. In a funded scheme, your money is invested just as it would be in a defined contribution pension. If your scheme is unfunded, that means there is no investment taking place. The money you contribute is being used to pay current pensioners; the contributions of other workers will be used to pay your benefits when you retire.

4. Do I have to participate in my company pension?

The rules surrounding auto-enrolment give every eligible worker the right to opt out of a company pension. At your discretion, you can decide not to participate in the pension offered by your employer. Should you choose to invest in your own stakeholder pension or SIPP, your employer might be willing to contribute to it on your behalf. However, there is no legal obligation for your employer to do so.

5. Can I still participate if I am not eligible for auto-enrolment?

In order to qualify for auto-enrolment, you must be at least 22 years old and earn a minimum annual salary. If you do not meet these requirements, you may be eligible to opt in to your company pension by meeting lesser criteria. Eligibility for opt-in means your employer will be required to contribute to your pension. Failure to meet eligibility requirements for either option is not the best scenario, but it does not mean you are left out of pension options.

Even as a part-time worker earning a minimal amount, you always have the opportunity to participate in your company pension scheme if the scheme allows it. Your participation does not include a mandate of employer contributions.

6. How much do I have to contribute to my pension?

Auto-enrolment rules require both you and your employer to contribute a minimum amount based on your annual salary. That amount will gradually grow through 2018. However, bear in mind that you may be required by your scheme to contribute more. You can never contribute less than the minimum unless you opt out altogether.

7. What happens if I leave my employer?

Leaving your employer offers you several different options. First, if you have contributed to your pension for fewer than two years, you may be able to take all of your contributions as a lump sum payment subject only to income tax. After two years you can:

  • leave your money alone and let it continue to earn
  • transfer your money into a new pension plan
  • use your pension pot to purchase a deferred annuity
  • take your entire pension pot as a lump sum cash payment if you are over the age of 55.

8. Do I pay taxes on my contributions?

All money contributed to a company pension is deducted from pay before taxes are applied. Therefore, you pay no income taxes on that money in the year that you earn it. You will pay income taxes on the money taken out of your pot during retirement. The 25/75 rule will apply.

9. What is the 25/75 rule?

Another popular company pension scheme FAQ is one relating to the new 25/75 rule that was created as a result of pension reform. Under this rule, anyone who is at least 55 years old can begin withdrawing funds from a pension without penalties. The first 25% of any such withdrawals can be taken tax-free. The remaining 75% is taxed at the individual's marginal rate in whatever year it was received.

For practical purposes, the government considers that 75% as income in the year you take it. So if you earned £25,000 and received £5,000 from your pension, your total income for that year would be £30,000. You would then be taxed based on the total amount.

10. What happens to my company pension when I retire?

When you are actually ready to retire, you again have a number of options. The most well-known option is to convert your pension pot into a lifetime annuity. An annuity guarantees income for life regardless of how long you live. There are several different types of annuities to choose from.

Other options include entering a drawdown contract, taking your entire pot as a lump sum cash payment, using your pension like a bank account, transferring your money to a qualified recognised overseas pension scheme, transferring it to a stakeholder pension or SIPP, or using the money to invest in other opportunities. Each of the options has strengths and weaknesses that need to be considered.

Get Good Advice

We hope these company pension scheme FAQs have been helpful to your understanding of how company pensions work. As always, we cannot stress enough the need to get good advice from a qualified financial advisor experienced in pension investing. While pensions are excellent tools for saving for retirement, they are not 100% foolproof. Unwise investing could mean you put money away for your entire working career only to find out it has lost value in real terms. Obviously, that is something you want to avoid.

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These company pension FAQs are designed only to give you a working understanding of how company pensions operate. Please consult with a financial advisor about how to apply them to your particular situation. A financial advisor has the knowledge and experience you need to develop a sound plan for your retirement.

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