Joining an Occupational Pension Scheme
An occupational pension scheme offered by your employer represents a good starting point for preparing for retirement. According to the Office for National Statistics, the number of occupational pension schemes in the UK with at least two members was nearly 28 million in 2013. That number has undoubtedly gone up due to the rolling staging dates for auto-enrolment.
Most workers should have the opportunity to join an occupational pension scheme at some point between now and 2018. Employers can choose to establish schemes through banks, insurance companies, specialist pension providers, and the government's NEST programme. As for workers, joining an employee-sponsored pension scheme will usually be a wise choice.
Occupational Pension Basics
Also known as workplace pensions, occupational pensions are schemes established by employers wherein the actual contract is between the pension provider and the company establishing it. Employees who join the scheme become members of it, but they are not contractually obligated in the same sense that their employers are.
Below are some important terms you need to know about occupational pensions:
- Defined Contribution (DC) – The most popular kind of occupational pension is known as the defined contribution scheme. The pension receives contributions from both workers and employers, with those contributions being invested on behalf of the worker. The worker's income in retirement is based on the performance of the scheme's investments.
- Defined Benefit (DB) – A defined benefit pension also receives contributions from both workers and employers. However, retirement income is based on one of two calculations: a percentage of the final salary the worker was receiving at the time of retirement OR an average salary calculated over a specific amount of time.
- Money Purchase – A money purchase scheme is a kind of defined contribution pension that may or may not include contributions from an employer. If you are not eligible for auto-enrolment and you do not meet the qualifications for opting in, you may do better with a personal pension than you would with a money purchase scheme.
- Final Salary – The final salary scheme is the same thing as a defined benefit scheme, only under a different name.
- Cash Balance – There is a hybrid pension scheme known as the cash balance scheme. This kind of pension combines some elements of a DC pension with elements of a DB pension. Cash balance schemes are not widely used at this time.
Before joining an occupational pension scheme, you should know all the details about contribution levels, eventual benefits, investment performance, and fees and charges. The average employee will do very well with the pension offered by his/her employer. However, there are times when a personal pension is a better option.
How to Join Your Company's Pension Scheme
Assuming your company already offers an occupational pension, joining the scheme should be relatively easy. Your first step is to contact your human resources department or whoever else might be in charge of overseeing company benefits. That department or individual can provide you all the necessary information on the company pension.
The second step is to establish whether you are eligible for auto-enrolment or not. In a nutshell, any worker earning at least £833 monthly, between the ages of 22 and the state pension age, must be automatically enrolled in a qualifying company-sponsored pension. Please bear in mind that your company may not yet participate in auto-enrolment. If so, it is likely because their staging date has not yet arrived.
If you are eligible for auto-enrolment, you will be enrolled from the start of your company's occupational pension scheme. You should be provided the necessary paperwork to finalise your enrolment. Should you decide not to participate, you will have the opportunity to submit the appropriate opt-out paperwork.
If you are not eligible for auto-enrolment, you may have two other options:
- Opting In – You have the right to opt in to your company's pension scheme under one of two circumstances: you make a minimum of £833 monthly but you are younger or older than the age requirements OR you make between £486 and £833 monthly regardless of your age. Opting in would require minimum contributions from both you and your employer.
- Enrolling – Even if you are not eligible to opt in, you may still have a right to enrol in your company's occupational pension if your income does not exceed £486 monthly. Enrolling is different in that it does not require minimum contributions from either you or your employer.
Choosing Your Investment Options
At the time of enrolment, you should be presented with at least a few investment options for your money. For example, your company's occupational pension might include a mutual fund, a collection of stocks and shares, and perhaps a set of bonds. You will have the opportunity to determine how much of your annual contributions you want to be directed to each kind of investment.
It is wise to do at least some research before making this decision. However, there is no need to get too stressed about it. Even if the investments you choose do not perform as well as you had hoped, you should have the opportunity to change those options on an annual basis. This ability offers you a fresh start at the beginning of every new enrolment period.
Your pension administrator should provide you with regular pension statements that will help you keep track of how your investments are doing. They may be presented on paper or electronically as the administrator sees fit. Never be afraid to ask for a statement if you do not believe you received one or you lose track of the ones you have. You can also request a statement at any time if you think you might be better off transferring out of your current scheme and into something else.
Pensions as Part of Your Overall Plan
We view the occupational pension scheme as very favourable for saving and growing retirement funds. Nevertheless, we would be foolish to say that they are a good choice for everyone. Each worker has to take a look at his or her personal situation to determine whether the pension offered by an employer represents a good deal. As always, the advice of a certified financial advisor is invaluable in this area.
Should you and your advisor determine that your company pension offers a good opportunity, use it as part of an overall financial plan that may also include things such as life insurance and savings. If it does not appear as if your company pension is appropriate in your circumstances, do not take that to mean you should not be investing in a pension at all.
It is still a good idea to put money into a pension one way or another. So if your advisor recommends against your company plan, consider one of the personal pension options. The two most common are stakeholder pensions and self-invested personal pensions (SIPPs). Both represent an opportunity to save for retirement without sacrificing the flexibility and benefits of occupational pension schemes.
We hope you have found this guide to be useful in your circumstances. If nothing else, remember that joining an occupational pension scheme offered by your employer is your right under most circumstances. Take advantage of that right to secure your financial future in retirement.
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