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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 increase.
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.