8. PENSIONS
Pot of money saved up over employee’s working life into which employee/employer make
contributions to provide employee/their estate an income during retirement
Benefits from relief from income tax subject to certain limits
o Not taxed on its way into a pension scheme = sum invested is larger
OCCUPATIONAL PENSION SCHEME
Set up and run by employer to provide employee benefits on retirement/death
Usually set up under trust = assets held on trust by trustees
o Administer trust in accordance with trust deed and scheme rules
Aka the definitive deed and trust
o Assets of the pension scheme do not belong to operating company itself
o Trustees add expense to the pension
DEFINED CONTRIBUTION SCHEMES (aka money purchase schemes)
Becoming more common – often cheaper for employer to provide and give employer
greater certainty as to pension costs – employers prefer
‘Defined’ = defined from employer’s POV (employer’s liability fixed)
o employer sets up and agrees in advance what level of contributions it is prepared to
make on behalf of employees (liability fixed to this amount)
o usually expressed as % of each employee member’s annual salary
o employees usually required to make contributions too as fixed % of salary
o output depending on performance of investment contributions
contributions made by/on behalf each member kept separate so its poss to know at any
one time how much each has
benefits on retirement depend entirely on return contributions
Annuity = insurance product that provides retired employee with a regular stream of
income until death
o Depends on how big pot has grown and how long life insurance company thinks
person will live for
Since 6 April 2015 it is now also possible to drawdown some or all of the money contained
in the pension pot, 25% of which will be tax free with the rest being subject to income tax.
NEST = government-run DCS (qualifying scheme for auto-enrolment legislation) to help
small employer comply with auto-enrolment obligations
o Both employer and employee can contribute
o If employee leaves, can take pot to the next employer
o Keeps charges for managing members’ pensions low
, FINAL SALARY SCHEMES (aka Defined Benefit Scheme)
Defined = defined from employee’s POV - aim is to provide fixed % of employee’s final
salary dependent on number of years service
o e.g. 1/60 x number of years worked
o members generally contribute a fixed % and employer pays balance of the cost of
the annuity required to fund promised pension
= uncertainty for employer – have to guarantee certain level of pension
regardless of performance of investments under the pension pot + costs of
annuities on market at time of retirement
At least every 3 years scheme actuary will prepare valuation - shows whether scheme
assets match expected liabilities
o if deficit, recovery plan must be agreed, setting out level of employer contributions
needed to ensure scheme on track to meet liabilities
employer cannot predict cost of providing retirement benefits with any certainty due to too
many variables
o e.g. how long employee will actually work for, performance of stock market etc
o costs tend to rise in times of economic downturn due to reduced returns on
investments
o costs around 25% of employees salary (10% for defined contribution)
o expensive for senior managers/directors who earn high salary during final years
subject to more regulation
benefits employee more than employer, increasingly rare
GROUP SCHEMES
Operated for employees of a group of companies
One co. within the group will be the principal – provides the scheme
Rest in group known as participating companies/employers
Scheme’s trust deed gives principal powers that other participators do not have e.g. power
to terminate the scheme
Single employer scheme = for the benefit of employees of one employer
Pot of money saved up over employee’s working life into which employee/employer make
contributions to provide employee/their estate an income during retirement
Benefits from relief from income tax subject to certain limits
o Not taxed on its way into a pension scheme = sum invested is larger
OCCUPATIONAL PENSION SCHEME
Set up and run by employer to provide employee benefits on retirement/death
Usually set up under trust = assets held on trust by trustees
o Administer trust in accordance with trust deed and scheme rules
Aka the definitive deed and trust
o Assets of the pension scheme do not belong to operating company itself
o Trustees add expense to the pension
DEFINED CONTRIBUTION SCHEMES (aka money purchase schemes)
Becoming more common – often cheaper for employer to provide and give employer
greater certainty as to pension costs – employers prefer
‘Defined’ = defined from employer’s POV (employer’s liability fixed)
o employer sets up and agrees in advance what level of contributions it is prepared to
make on behalf of employees (liability fixed to this amount)
o usually expressed as % of each employee member’s annual salary
o employees usually required to make contributions too as fixed % of salary
o output depending on performance of investment contributions
contributions made by/on behalf each member kept separate so its poss to know at any
one time how much each has
benefits on retirement depend entirely on return contributions
Annuity = insurance product that provides retired employee with a regular stream of
income until death
o Depends on how big pot has grown and how long life insurance company thinks
person will live for
Since 6 April 2015 it is now also possible to drawdown some or all of the money contained
in the pension pot, 25% of which will be tax free with the rest being subject to income tax.
NEST = government-run DCS (qualifying scheme for auto-enrolment legislation) to help
small employer comply with auto-enrolment obligations
o Both employer and employee can contribute
o If employee leaves, can take pot to the next employer
o Keeps charges for managing members’ pensions low
, FINAL SALARY SCHEMES (aka Defined Benefit Scheme)
Defined = defined from employee’s POV - aim is to provide fixed % of employee’s final
salary dependent on number of years service
o e.g. 1/60 x number of years worked
o members generally contribute a fixed % and employer pays balance of the cost of
the annuity required to fund promised pension
= uncertainty for employer – have to guarantee certain level of pension
regardless of performance of investments under the pension pot + costs of
annuities on market at time of retirement
At least every 3 years scheme actuary will prepare valuation - shows whether scheme
assets match expected liabilities
o if deficit, recovery plan must be agreed, setting out level of employer contributions
needed to ensure scheme on track to meet liabilities
employer cannot predict cost of providing retirement benefits with any certainty due to too
many variables
o e.g. how long employee will actually work for, performance of stock market etc
o costs tend to rise in times of economic downturn due to reduced returns on
investments
o costs around 25% of employees salary (10% for defined contribution)
o expensive for senior managers/directors who earn high salary during final years
subject to more regulation
benefits employee more than employer, increasingly rare
GROUP SCHEMES
Operated for employees of a group of companies
One co. within the group will be the principal – provides the scheme
Rest in group known as participating companies/employers
Scheme’s trust deed gives principal powers that other participators do not have e.g. power
to terminate the scheme
Single employer scheme = for the benefit of employees of one employer
