Workplace Pension / Occupational Pension — Unbiased Independent Financial Advisers Ltd

Workplace pensions, also known as occupational pensions, are arranged by employers rather than by the state or an individual. The employer, and the employees, are required to contribute to the fund.

An occupational pension is paid on top of your state pension and the contributions you pay to an occupational pension scheme are separate from and on top of the national insurance contributions you pay for the state pension.

After the introduction of the Government’s pensions automatic-enrolment policy which began in October 2012, employers now have to set up and contribute to a pension scheme for their staff with effect from October 2018. Employers must contribute at least 3% of their employee’s basic pay and potential employer contribution is 5% into an appropriate pension scheme.

The two main types of workplace pension are:

• Defined benefit (DB) schemes (such as career average or final salary schemes) where the income on retirement is effectively guaranteed by the employer. This type of pension means you’ll get a pension based on a percentage of your earnings. Broadly speaking, the greater your salary and length of service the bigger your pension should be. These pensions offer a more predictable pension. In the private sector, many of these schemes are now closed. DB schemes are usually found in the public sector.
• Defined contribution (DC) schemes (also known as money purchase schemes) where the income on retirement depends on factors such as stock market performance, the amount of money contributed to the scheme and related charges and fees. DC schemes are either contract-based (provided by a third-party) or trust-based (run by an employer through a trustee board). DC plans open to all employees are typically found in the private sector.

Contribution Limit

Contributions are typically payable by both the employer and employee and qualify for tax relief. The pension contribution limit is currently 100% of your income, with a cap of £60,000 per annum. If you contribute more than £60,000 in a year into your pension, you won’t receive tax relief on any amount over the contribution limit. Although few people are affected by the legislation, it’s still important to understand it, because if you exceed it you will face a tax charge.

For 2023/24 the tax free annual limit is 100% of your salary or £60,000 (whichever is lower). This includes both contributions paid by you and contributions paid by your employer.

How does an occupational pension affect your state pension?

Under the new State Pension rules occupational pensions do not affect your right to a state pension. Currently you must have at least 35 qualifying years of national insurance contributions to qualify for the full new State Pension amount

What happens to your pension if you leave employment?

When you change job, your old pension provider should have written to you to explain your options under the scheme.

If they haven’t and you have their details, contact them and request them to write your options.

If you were in a defined benefit scheme, it’s usually best to leave the pension where it is and the Trustees will look after it for you.

When you retire, it’ll then pay you an income for the rest of your life.

If you were in a defined contribution scheme, you’ll often have two options:

• Leave the pension where it is. It will continue to be invested and hopefully grow over time. You can decide how to use it later. You might even be able to continue to contribute to it if you want.
• You can move the money to your new pension provider, called transferring your workplace pension. This can make it easier to keep track of and manage your pensions. It might even save you costs too, as you won’t be paying each provider separately.

There can be benefits and drawbacks to bringing your pensions together.

Combining your workplace pensions you previously held

Transferring your pensions into one pot can offer better value for your money and giving you more control and insight over your retirement savings

Make sure you won’t lose any guaranteed benefits or incur an expensive exit fee when transferring an Auto Enrolment pension.

Unbiased Independent Financial Advisers can assist you in consolidating all of your previous pensions into a single manageable pot, as opposed to having multiple pensions dispersed throughout your career.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.