Occupational Pension Scheme
An employer or occupational pension plan is a pension plan that is set up by an employer to provide pension and other benefits for employees. The main advantage of this type of plan is that your employer must make a contribution to it, even if the contribution is small.
The rules of the pension plan are set by your employer, who appoints ‘trustees’ to look after it. You get tax relief on your contributions, as your employer automatically takes your contributions from your salary, before deducting income tax on your remaining income.
The income you get when you retire depends on whether your employer plan is:
- A defined benefit plan; or
- A defined contribution plan.
Ask your employer, HR Department or pension trustees for information on which type of pension you have, as there are important differences between the two.
A Defined Benefit Plan
With a defined benefit plan, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years’ service, including the state pension.
With this type of plan, you can predict your pension income, based on your salary and years of service.
A Defined Contribution Plan
With a defined contribution plan, you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you come to retire and the annuity rates at the time. The value of your pension fund depends on:
- the value of the contributions paid in by you and your employer
- the investment performance, or gains and losses, of the pension fund
- the amount of fees and charges the pension investment company applies
Most employer plans and all personal pension plans and PRSAs are now set up as defined contribution plans, so the final value of your pension depends the amount contributed, and how your funds perform. You should examine the benefit statement that you receive each year from the trustees and regularly review your contributions, and ensure that the funds your pension is invested in is appropriate for you.
Your employer’s plan may allow you to make Additional Voluntary Contributions (AVCs), through the group pension scheme if you want to increase your pension fund or benefits, or you may wish to make AVC’s to your own personal arrangements through an AVC PRSA.