Company Pensions - The Facts!
In broad terms a company pension can be explained as a pension
which is established by a company to accommodate the pension
needs of its employees. There are two types of company pension.
There is a contributory company pension, in which the pension
contribution is automatically taken out of the employee's
salary, before tax and to which the employer can choose to match
this contribution with their own. There is also the
non-contributory company pension, in which the company
contributes the payment towards the pension on the employee's
behalf.
Final Salary Explained
The final salary company pension scheme offers the employees a
proportion of their salary at the time of retirement. This
figure is normally calculated as one sixtieth of the employee's
salary multiplied by the number of years they have been employed
within the organisation. This company pension has frequently
appeared in the press recently as many larger UK firms have
closed this company pension to new employees and in some cases
have frozen the pension of existing employees. This has occurred
as the risk of this type of pension lies with the employer and
not the employee.
Money Purchase Explained
With the money purchase company pension, the actual pay-out sum
on retirement is directly attributable to the amount of money
the employee has paid in, how well the investments perform and
the annuity rate. Unlike the final salary company pension, the
risk lies with the employee.
Final Salary v. Money Purchase.
Although the headlines keep drawing our attention to the fact
that many companies are moving away from the final salary
company pension towards the money purchase, it would be
dangerous to automatically presume that you are better off with
a final salary scheme rather than a money purchase. In fact,
even though it is generally accepted that the move away from
final salary schemes is not in the best interest of the
employee's future, there are individuals who may be better off
under a different scheme anyway. It will depend on an
individual's circumstances. For example, a person who changes
their employer every year may be much better off with a money
purchase scheme as it could provide them with greater
flexibility. It is always best to discuss your personal
situation with an experienced and unbiased financial adviser in
order to decide which company pension is the most suited to your
circumstances.