Company Pension FAQs Part 2

05 August 2016 - Posted by ebaxter

What is NEST?

NEST stands for the National Employment Savings Trust and is a scheme set up by the Government to ensure all employers can access low-cost pensions so they can meet their auto-enrolment duties. The scheme is free for employers to join and has low charges, allows flexible contributions and is a defined contribution scheme, meaning employees can build up their own pension through their own contributions and employer contributions. You can find out more about NEST by visiting its website.

How do company pensions work?

How a scheme works will vary with each provider but as a rule there are two types of company pensions – a defined benefit pension and a defined contribution scheme.

  • A defined benefit scheme pays out a set annual income when you retire. These are also known as final salary pensions and the amount you receive will depend on your income when you retire from the company.
  • A defined contribution scheme doesn’t pay out a set amount and instead the amount you receive will depend on a number of things such as how much money you pay in, how much money it gains from being invested and whether you choose to take some or all of your pension as a lump sum.

Which is better – a company pension or a private pension?

With a company pension, also known as a ‘workplace’ pension, you have the chance to belong to a defined benefit scheme, which is thought of a superior as it offers a guaranteed amount at the end of your working career. Additionally, your employer will usually add to the payments going into your pension pot as part of a defined contribution workplace pension.

Which is better – a company pension or an ISA?

Company pensions perform better than ISAs as your provider can claim tax back on the majority of the pension pot (75%), which means for every £100 paid into the account, you get £125 in your pension pot.

How can I protect my company pension?

You won’t need to protect your pension yourself as workplace pensions have regulations in place which minimise risks, whether they are managed by the employer or a private scheme.

Can I quit my company pension?

You can quit your company pension scheme at any time without losing your pension benefits. However, your employer will stop paying contributions into your pot.

Can I still have a company pension if I am self-employed?

If you leave your job to become self-employed you may be able to continue paying into your workplace pension. This will depend on your scheme provider. People who are self-employed or who are the sole director of a company can join the National Employment Saving Trust (NEST).

What are the different types of company pension?

There are two types of company pension schemes: defined contribution schemes and defined benefit schemes.

Are company pension contributions tax deductible?

Yes. Your employer can automatically take the contributions out of your wages before income tax has been deducted. Tax relief can also be added to your pension pot by your pension provider. This is known as ‘relief at source’.

What company pension schemes are available for directors?

Company directors can take advantage of a number of company pension schemes, including:

  • Workplace pension. This can be either a defined contribution scheme or and defined benefit scheme.
  • Personal pension. This defined contribution pension will depend on the money you pay in and how it has performed over a period of time.
  • Executive pension plan. This is tax-efficient fund set up for key employees.
  • Self-invested personal pension (SIPPS). This defined contribution pension is similar to a standard personal pension but allows you to invest your pension pot in a wider range of assets.
  • National Employment Saving Trust (NEST). If you are the sole director of a company (known as a single group director) you have the option of joining this Government scheme.

What’s the maximum and minimum I can contribute to a company pension?

You must pay a minimum percentage of what is known as your ‘qualifying earnings’. This refers to your salary before tax. The minimum is set at 0.8% of your qualifying earnings. There is no limit to how much you can pay into your pension, but there is a limit on the amount that you can expect an employer to pay a percentage of into your pension pot. This is set at £42,385 a year. (Please check)

What happens to my company pensions if…?

  • I leave my job? You will not lose your pension benefits, but your employer will stop paying in contributions. You can then choose to either transfer your pension pot to a scheme set up by your new employer, or transfer it to a new personal pension scheme.
  • I’m fired from a job? Sometimes employers can take back the contributions they have made to your pot. This will depend on the type of scheme that you are in.
  • I’m made redundant? You have a number of options:
    • Early retirement. If you’ve been in the job for a long time you may have the option of taking early retirement on a reduced pension.
    • Move pension pot. You can transfer your pension pot to a scheme run by your new employer, or into a personal pension.
    • If you haven’t been a member for long, you may be able to get a refund.
    • Pension stays with old employer. This is known as a deferred pension, which you will receive when you retire.
    • Buy-out policy. Similar to moving your pot, this guarantees a minimum pension. However, the pay-out can be affected by inflation and interest rates.
  • If I go on maternity leave? You will still continue to make contributions to your pension scheme if you are getting paid, as will you employer. If you are on unpaid maternity leave, your employer will make contributions up to the first 26 weeks.
  • If I get a divorce? Your pension will be taken into account when the court determines any settlement. This means that you may end up with a lot less than you originally expected. If you are getting a divorce, it is recommended that you seek advice from your IFA and solicitor regarding the possible impact on your pension.
  • If I take early retirement? This will depend on your pension provider. Some may not allow you to take retirement before a certain age. With both defined contribution and defined benefit schemes, it is likely that your pension will be reduced. If you are retiring due to illness, some providers may offer to boost your pension. It is important to talk to your FSA before making a decision.
  • If I die? This will depend on the type of pension that you have and whether or not you have started to draw it.
  • With a defined benefit scheme that you have not started drawing, your family will usually receive a single large payment, and may also receive regular payments after that. If already started, your family will continue to receive your pension, though the payments will be less than those you received.
  • With a defined contribution scheme, your family will inherit the money you have paid in and will usually have the choice of receiving a regular income or drawing it out in a single lump sum. If you have started your pension, then you will have already been given options on how you draw it out. This choice will affect what your family receives in the event of your death. In some cases, your family may not receive anything. If you are concerned about this issue, you should speak to your IFA.
  • If my employer goes bust? There are protections in place that will guarantee you a pension in the event of this occurring. The Pensions Protection Fund (PPF) was brought in to protect employees on a defined benefit scheme whose employers have gone bust. The amount you receive may not be in line with what you were expecting, but in most cases the variation will be small. For those on a defined contribution scheme, your final pension pot should not be affected.