Occupational pension schemes are set up by employers to provide pensions for their employees. There are two different types of occupational pensions:
- final salary schemes
- money purchase schemes.
Final salary schemes
Final salary pension schemes can also be called defined benefit schemes. In a final salary scheme, your pension is linked to your salary while you’re working, so it automatically increases as your pay rises. Your pension is based on your pay at retirement and the number of years you have been in the scheme. Your pension entitlement doesn’t depend on the performance of the stock market or other investments.
In most final salary schemes, you pay a set percentage of your wages towards your pension fund and your employer pays the rest. This means it’s usually a good idea to join a final salary scheme if your employer offers one. However, final salary schemes are becoming less common and most employers no longer offer them.
Money purchase schemes
Money purchase schemes can also be called defined contribution schemes. The money you pay into the scheme is invested with the aim of giving you an amount of money when you retire. Your pension is based on the amount of money paid in and on how the investments have performed. You’ll usually pay a percentage of your wages into the scheme and your employer may also pay a regular amount in but this isn’t always the case. However, your employer may have to offer you automatic enrollment into a workplace pension, in which case they will be obliged to make contributions.
If you’re offered a money purchase scheme through the workplace, it can be a good idea to join if your employer makes contributions. However, if your employer isn’t going to make any contributions to the pension or you are not yet eligible for automatic enrollment, you may want to compare the benefits of the scheme with personal pensions schemes elsewhere.
Other benefits of occupational pension schemes
As well as a pension when you retire, occupational pension schemes often offer other benefits such as:
- Life insurance which pays a lump sum or pension to your dependents if you die while still employed
- A pension if you have to retire early because of ill-health
- Pensions for your, wife, husband, civil partner and other dependents when you die.
Automatic enrollment into a workplace pension
Between October 2012 and April 2017, an employer must enroll you into their workplace pension if you are an eligible employee. This is called automatic enrollment. You will be eligible if you are:
- Not already in a workplace pension
- Aged 22 or over
- Under State Pension age
- Earn more than £10,000 a year
- Work in the UK.
Group personal pensions and stakeholder pensions through your workplace
Workplace (or group) personal pensions and stakeholder pensions work in a similar way to the ones you can arrange for yourself.
Your employer chooses the pension provider but you will have an individual contract with the pension provider.
Group personal pensions and stakeholder pensions may be an option if you are not eligible to automatically enroll into your workplace pension.