If you have the opportunity to join a company pension scheme, you should seize it with both hands because your employer contributes into 'the pot' on top of your contributions. What's more, the charges for running the scheme are paid by the employer, and are usually lower than those for personal pensions. There are important additional benefits to a company scheme, too. These include death-in-service benefits similar to life assurance. A pension may also be payable if you have to retire early through ill health.
And any pension plan is tax-efficient as your contributions benefit from tax relief at your marginal rate and the pension fund investments roll up gross of tax. So higher-rate taxpayers enjoy tax relief of 40 per cent, so a £100 contribution costs £60.
The best type of company pension is a Final Salary (FS) scheme. This is also known as defined benefit scheme. Here, the amount you receive at retirement will be based on your salary when you retire, or leave the company, and the number of years you have belonged to the scheme. Typically, it's paid at the rate of 1/60th of final salary multiplied by the years of membership, with a maximum pension after 40 years of service of two-thirds of your final salary. It's also possible to take a tax-free, cash lump sum in exchange for a lower annual pension.
Closure
Sadly, employers are closing the doors to FS schemes, and it is possible that within 10 years almost all FS schemes will be closed to new members. Indeed, some may be wound up altogether.
The other type of company pension, known as Money Purchase (MP) – or defined contribution – is regarded as inferior to FS because there is no guaranteed pension at the end and employers usually pay less into 'the pot'. In most FS schemes, staff pay in 5 per cent of salary with employers contributing 10 per cent, but typically in MP schemes both employees and employers contribute 5 per cent of salary.
With a MP scheme, you don't know what your actual pension will be, because this depends on the final value of the fund at retirement and on the rates available when the fund is converted into an annuity (which pays you an income until you die). You can record what has gone into 'the pot' year on year, but what comes out at the end depends entirely on the performance of fund managers over the duration, and the economic conditions at the time of retirement. This means you, as the employee, bear all the risk.
However, MP schemes have their advantages. Generally, employees have greater control over the investment of their pension fund. In addition, MP schemes are more easily transportable, which will be important to those intending to move jobs or take career breaks.
You can invest up to 100 per cent of your annual income, subject to a maximum of £215,000, and you can also contribute to a full personal pension alongside your occupational scheme.
