What is an occupational pension?
An occupational pension is a pension scheme provided by your employer. There are many different types.
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 and with effect from October 2018 employer’s must contribute at least 3% of their employees’ basic pay into an appropriate pension scheme.
What types of pension are available to you?
In the broadest terms, there are two types of occupational pension commonly available to you.
These are either “defined benefit” pensions – usually final salary or career average (revalued earnings) schemes – or defined contribution/money purchase schemes.
- Defined contribution: Your pension depends on the amount of money put into the scheme, how well the funds have been invested, the level of charges applied to your fund, and then how much pension your money will buy when you need to retire. This is based on the annuity rate at the time you retire. Annuity rates are half what they were 25 years ago which means they buy half as much pension now as they did then. These pensions offer no guarantee of the level of pension to be paid on retirement. Please see our DC Factsheet at https://www.unison.org.uk/content/uploads/2017/07/So-what-exactly-is-a-Defined-Contribution-Penson-Scheme.docx.
- Defined benefit: 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. Nearly all public service schemes including the Local Government Pension Scheme and the NHS Pension Scheme are defined benefit schemes.
Stakeholder pensions and personal pensions are also available.
While these can be offered on a group basis, they are defined contribution schemes where a member has a direct contract with the provider.
Employers are increasingly turning to such schemes as they offer much less risk to them and instead place it all on the employee.
Contributions are typically payable by both the employer and employee and qualify for tax relief. Scheme rules will specify members’ contribution rates and employees qualify for full income tax relief on these, as long as their total gross pension contributions do not exceed 100% of their earnings or £40,000.
- A member can usually elect to top up their required occupational pension contribution by making an additional voluntary contribution or AVC.
- An AVC fund is effectively a separate fund offering additional pension benefits to those earned in the occupational scheme, but in respect of the same employment.
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. Currently £175.20 a week.
Being a member of an occupational pension scheme could however have affected your pre April 2016 state pension entitlement if it was “contracted-out” of it. The benefit to you of this is that you would have paid less in national insurance contributions. You can always check your position by requesting a State Pension Forecast which you can do at www.gov.uk/check-state-pension.
Claiming your occupational pension
You have a right to draw your pension at your scheme’s normal pension age, which for many is at 65. The minimum retirement age for most members is age 55, although benefits will usually be reduced for being paid earlier.
It can be possible for the pension to be paid before 55 in the event of ill health. Your pension administrator will be able to confirm your pension age as well as an annual statement detailing your current entitlement.
You commonly have to retire or take a “retirement break” to be able to start drawing your pension.
What happens to your pension if you leave employment?
Changing employers usually means:
- You can leave your pension in the scheme, where it will usually increase each year in line with inflation, and become a deferred member – normally, you need to have been a member for at least two years for this.
- If you are not entitled to a deferred pension, you can claim a refund of the pension contributions you have made, and you will be taxed on this;
- If you have at least three months service, you can look at transferring the pension you have built up to another qualifying pension scheme.
Even if you decide to remain as a deferred member, you are able to join other company pension schemes in the normal manner.
UNISON works to defend good pension schemes and improve and promote affordable, decent pensions for all our members, wherever you work.
Occupational pensions and auto-enrolment
Does my employer have to offer me a pension scheme?
Yes. As long as you are aged between 22 and State Pension Age and pay income tax, your employer has to provide you with a pension scheme that satisfies minimum standards. Read our UNISON briefing paper for more information on these “minimum” requirements, found under “All articles”.
What exactly is pensions auto-enrolment?
This is the legal requirement for your employer to pay contributions into a pension scheme for you that satisfies certain minimum standards. You can opt out of this scheme at anytime should you wish to, although please note that your employer has a statutory obligation to re-enrol you into this pension scheme at three-yearly intervals. Read our UNISON briefing paper for more information, found under “All articles”.
What if I want to make additional contributions to my pension?
You should check with your pension scheme administrator to see if your scheme allows you to buy added years or additional pension.
These are both are good ways of making additional, tax-free, pension savings.
Your scheme may also offer an additional voluntary contribution scheme and you can also make additional pension contributions through a stakeholder or personal pension scheme.
What if my employer doesn’t have a pension scheme?
Starting from October 2012, employers hve been obliged to have a pension scheme in place to which they contribute.
This is being phased in and whether your employer falls under this ‘auto enrollment’ requirement yet will depend on their size.
It will apply to all employers by 2018.
If you want to save for your retirement it usually makes sense to join an employer-sponsored pension scheme so you benefit from an employer contribution.
What if my employer goes out of business?
If your employer goes out of business, the scheme trustees will try to use the pension scheme assets to secure your pension benefits with an insurance company.
Pension schemes are usually formed “under Trust”, meaning that pension assets are entirely separate from those of the business.
If there aren’t assets within a pension scheme to secure your pension benefits, you could potentially be protected to a degree by the Pension Protection Fund.
Read more about the Pension Protection Fund.
What is a stakeholder pension?
This is a type of pension where what you get on retirement depends on the amount invested, investment performance, level of charges and the rate you convert your fund into a pension at retirement (known as the annuity rate) . Your employer will usually contribute to any group stakeholder pension scheme they administer , but this is not compulsory
Why should I join my company pension scheme? Retirement is years away.
Please read our 10 reasons to save for a pension factsheets which should give you food for thought if you are a reluctant pension saver. We have produced a generic, LGPS and NHSPS specific factsheets which you can find under “All articles”.