Pensions
Advice on Occupational Pension Schemes
At Wardour we have a number of authorised pension specialists who solely provide advice for deferred members of occupational pension schemes.
Even since A-Day when the rules regarding pension were ‘simplified,’ evaluating the best option is still complex, and the wrong decision will have a detrimental effect on your retirement income. The important factors to consider are:
- How much will your scheme benefits will be worth to you in retirement?
- What other potential sources of retirement income do you have?
- Whether you will have a need for a tax-free lump sum?
- How and when would you like to draw your pension benefits?
- What the spouse’s and dependants’ benefits are?
- Whether you expect to be in good health when you retire?
How we can help?
One of our authorised pension specialists will assist you and can:
- Provide you with a report detailing your deferred company pension scheme benefits
- Explain the advantages and disadvantages of transferring these benefits
- Research a suitable provider, if a transfer is in your best interests
- Discuss your investment strategy
- Provide you with a formal recommendation in writing
- Provide ongoing investment advice to ensure the recommendation continues to meet your future needs
Additional reading to help you
FSA Guide to the risks of occupational pension transfers:
An Introductory Guide to the Pension Protection Fund:
FSA Guide - Just the facts about income withdrawal
FSA Guide - Just the facts about pensions
FSA Guide - Just the facts about your pension – it’s time to choose.
Call 01932 338205 Or email info@wardourpartners.co.uk
Background
Occupational pension schemes are employer-sponsored arrangements which provide income in retirement for employees.
The pension scheme is held under a trust for the benefit of the members and is run by a board of appointed trustees. The company is responsible for the funding of the scheme and does not own the assets of the scheme. The exception to this is public sector schemes, some of which are “unfunded,” i.e. they are sponsored indirectly by the UK taxpayer.
Final salary schemes are also known as defined benefit or salary related schemes. Whilst employed and a member of the scheme, the member accrues a level of benefit dependent on:
- the length of time served in the scheme (known as pensionable service);
- earnings prior to retirement (known as final pensionable salary); and
- the scheme's 'accrual rate'.
The accrual rate is the proportion of salary that is accumulated for each year of service. If the scheme has an accrual rate of 60, members will receive 1/60th of their final pensionable salary for each year of service completed.
Example: an employee retires after completing 30 years service with his employer on a salary of £40,000 per annum. Assuming an accrual of 1/60th, the member would be entitled to a pension of:
1/60th x 30 years x £40,000 = £20,000 per annum
Pension section links:
advice on occupational pension schemes | stakeholder pension schemes | personal pensions | sipp | post retirement | phased retirement | annuity purchases
For members who are still in service with the scheme’s Principal Employer, final salary pensions invariably offer generous benefits. Upon leaving pensionable service, the benefits will increase depending on the scheme rules for “deferred members,” and therefore each scheme will be potentially different. However, all schemes are governed by the minimum standards imposed by statute. Hence, the commonly used term of ‘frozen pension’ is misleading.
In addition to providing a pension at retirement, most schemes provide a spouse’s pension, both in deferment and in retirement. At retirement there is usually an option to convert (or “commute”) some of the pension to a tax-free lump sum (“pension commencement lump sum”). A few schemes provide a lump sum in addition to the pension, e.g. Local Government Schemes and Teachers’ Pensions.
Early retirement is permitted in most cases, however, the scheme may impose an early retirement factor as the scheme will be paying out the benefits for longer.
Money Purchase schemes are also known as defined contributions (DC) schemes. Whilst employed and a member of the scheme, the employer and usually the employee contribute either a fixed amount or percentage of earnings into the scheme. The income payable in retirement will depend on a number of factors: the level of contributions, the underlying growth of the fund, the annuity rates available at retirement, the charges / administrator costs and your personal tax status (and the tax legislation at the time.)
These types of schemes are generally preferred by employers because there is no real ongoing liability other than the employer’s contributions to the scheme.
Some Money Purchase Schemes are contracted-out of the State Earnings Related Pension Scheme (SERPS) and State Second Pension (S2P). For Pre 97 benefits this can either be on a Guaranteed Minimum Pension (GMP) or Protected Rights basis. At retirement a member would not be entitled to a SERPS or S2P pension for the years they were a member, as this must be provided by the scheme (although the State does potentially provide a proportion of the GMP escalation in payment).
Buy-out plans (formerly known as Section 32 buy-out bonds) or money purchase occupational schemes which have been ‘Personally Assigned’ to the members are pensions which retain the ‘occupational pension rules’. A buy-out plan is a single premium investment from a former occupational scheme. Both these schemes may hold GMPs or Protected Rights. These schemes are not automatically placed under a discretionary trust, as personal pensions are. Therefore if the policyholder were to die before taking benefits, the proceeds may be subject to Inheritance Tax. A policyholder should consider whether to place these benefits under trust.
