Pension Planning: What you should know

With company pension schemes being in the news recently, we thought it could be useful to look at the types of schemes out there and the benefits of these schemes. There are two types of company schemes:

• Defined benefit schemes – also known as final salary
• Defined contribution schemes – also known as money purchase schemes

Defined benefit schemes are becoming increasing rare today. As a pensioner of one of these schemes one receives a set income based on how much they earned as an employee and also for how long they worked for the employer. The rules of the scheme are often set by the employer and the running of the scheme is overseen by a board of trustees on behalf of the employer. These are becoming increasingly rare in the private sector and those that are still in existence are often closed to new members. This is because the principal risk of the pension scheme is on the employer. Put simply if the pension scheme is expected to have in sufficient funds to pay out to its pensioners then the onus is the employer to make up the shortfall. Clearly these are the best type of company pension but because of the cost and risk of final salary pension schemes they are only likely to be found in the public sector today. BHS had a final salary scheme and there simply wasn’t enough money in the pension pot to pay out the future pensions and the company wasn’t in a position to make up the shortfall. As companies are now required to provide a pension scheme to its employees under the auto-enrolment legislation then by far the most common form of company pension scheme to be found today are defined contribution schemes. In simple terms both the employee and employer contribute to a company pension scheme during their employment. Depending on how that pension fund performs will determine what pension the employee receives during their retirement. So if the pension fund performs poorly then a pensioner may not receive any income at all, there is no responsibility on the employer to make up the shortfall. So with defined contribution schemes the risk moves to the employee. The likelihood of a defined contribution not making a payment at all is very rare as scheme performance is closely monitored by the trustees and the regulators. There are benefits for both sides paying into a company pension scheme. For the employer they can receive a corporation tax deduction for their contributions. For the employee as a minimum employers will match your contribution some may even pay in excess. Also the employee will not pay incomes tax on their contribution where the employer deducts the employee’s contribution from their gross pay (this is a net pay arrangement). At Wisteria we have experience of advising companies and their staff of setting up and contributing into a pension scheme. For further assistance with this matter then please contact Jeremy Asher or call 020 8429 9245