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Companies with more
than five workers must provide access to a pension plan. Many will
match contributions and some will even contribute more than what an
employee contributes. Employees should take advantage of any such
company pension scheme.
Company Pension Overview
Company pensions are
sometimes known as occupational pension schemes. Big companies will
usually run their own pension schemes whereby money is automatically
deducted from employees' paycheques and placed in the pension fund.
Companies will often make their own contribution, as well. If they
run their own, charges associated with running the pension are borne
by the company.
Many employers will
match contributions made by their employees. Some will go further
and contribute more. For example, if an employee contributes 4%, the
employer might contribute 6%. Employees should check the details of
their plans to best take advantage. Some employers are not as
generous, but those that are effectively give their employees a pay
Money-purchase Pension Schemes
Also known as defined
contribution schemes, these pensions depend on what a worker has
contributed over the lifetime of the pension, not on their final
salary. Workers know what they are contributing to the pension, but
the end result depends on how well the fund has been managed and
economic conditions at the time of their retirement. Upon
retirement, the money is generally used to purchase an annuity,
which will pay the worker income until they die. Workers can shop
around for annuities.
Final Salary Pension Schemes
Also known as
'defined benefit' schemes, these plans base the amount a worker
receives on their final salary and the length of time they have been
part of the scheme. Generally, these are paid at a rate of
one-sixtieth of one's final salary multiplied by the number of years
in the scheme, also known as the accrual rate. Pension benefits
increase as the length of service to the company increases.
Because the pension amount is based on final salary and years of
service – and not on economic conditions – these pensions are
considered the safest and most desirable. They are also becoming
rarer, with many companies switching over to money-purchase schemes.
When a worker changes
jobs, they generally have the option to leave the money in the
scheme to collect at retirement or to transfer it to their new
employer's scheme or their personal pension. The best choice depends
on individual circumstances, so workers should seek the advice of
Independent Financial Advisers if they need help.