Occupational Defined Contribution Schemes

Occupational Defined Contribution Schemes – Pensionfinder

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    Occupational Defined Contribution Schemes

    This type of pension provision is popular with employers as they can control the cost of their pension provision. Unlike a final salary scheme where the employer must make sure that the scheme can meet its members’ pension benefit obligations, with an occupational DC scheme it is up to the employee to make enough contributions to provide for their retirement.

    Occupational defined contribution schemes are set up by employers to provide a way for their employees to save for their retirement and are sometimes referred to as a ‘money purchase’ scheme.

    How the scheme works

    A company DC scheme builds up a personal fund or pension pot for each employee that is a member using employee and employer contributions, tax relief and investment returns. The fund is invested in stocks and shares, and other investments. Occupational DC scheme usually let you choose from a range of investment funds. At retirement the accumulated fund is converted into pension income through the purchasing of an annuity.

    Occupational DC schemes are run by pension trustees. It is their job to look after scheme members’ interests. Usually, both the employee and the employer make contributions to a company DC scheme. The employer deducts contributions from the employee’s salary before it is taxed.

    The pension the employee can expect to get when they retire will depend on:

    The total amount paid in by the employee, the employer and tax relief,
    The investment returns achieved by the pension fund or funds,
    The fees taken out by the pension provider, and
    The annuity rate used to convert the pension pot into pension income at retirement.

    If you change jobs you have two options. You can stop your contributions and defer your pension by simply leaving it there. Or, you can transfer it to your new employer‘s scheme or personal pension. There are costs and some risks to transferring a pension, so it is best to get professional advice first.

    The advantages

    Pensions are a tax-efficient way to save for retirement as contributions qualify for tax relief. This is 20% for a basic rate taxpayer and can be 40% for higher rate taxpayers. The new additional-rate of tax for those with annual earnings of £150,000 or more will be introduced on the 6th of April 2011. The Government is restricting tax relief on all contributions by these taxpayer to just 20%.

    You will probably find it to your advantage to become a member of an occupational defined contributions scheme if your employer is making contributions, as these will help to boost your pension savings and are an important employee benefit.

    Your employer may also include other benefits with their DC scheme, such as life cover.

    You should have a choice of investment funds which you use, allowing you to choice those that match your needs and approach to risk and reward. You should be able to invest in several funds to help spread the level of risk.

    The disadvantages

    With a defined contribution scheme the risk of inadequate pension income is borne by the holder. It is their responsibility to ensure they make adequate contributions to their pension plan and monitor their fund’s performance. They will need to be pro-active with their pension planning to get the most out of their DC company scheme and their annuity.

    When a member decides to retire and uses their accumulated pension savings to buy an annuity, the amount of pension income they receive will depend on the type of annuity purchased and the annuity rate used. Annuity rates can vary adding another level of uncertainty for members of occupational DC schemes.

    You will be responsible for the fees charged by the pension provider to run your pension fund. These will be taken out of your contributions.