Occupational Pension

Occupational Pension Schemes are either:

• Contributory, where you give part of your earnings (typically 5% of your gross salary) in addition to your employer's contribution
• Or Non Contributory, where your employer makes all the payments

In either case your employer has to pay for a substantial part of the administration costs of the pension scheme, by law. And you also get tax benefits from the Inland Revenue (see tax benefits for occupational pensions further down).

If you can join an occupational pension scheme then do so. Refusing it is likened to turning down a pay rise. You may dislike your pension payment / contribution being held back from your monthly salary and going into your occupational pension scheme. But it's being saved for you and will remain your money.

An Occupational pension doesn't have to tie you down. You can change jobs and it could keep growing for you without you making any more payments / contributions.

Different Types of Occupational Pension Schemes

Money Purchase Schemes

These are also known as Defined Contribution Schemes and are one of the two main types of occupational pension scheme (the other being the Final Salary Scheme).

The Money Purchase Scheme is where the employee effectively has their own "pot" within the occupational pension fund. How much of a pension s/he ends up with depends on:

• How much has been paid in (by the employee and/or the employer)
• How well the pension fund has grown i.e. how well the fund managers have done in investing the fund
• What the annuity rates are at the time you retire and buy one

Final Salary Schemes

These are also known as a salary related schemes or defined benefit schemes and are one of the two main types of occupational pension scheme (the other being the Money Purchase Scheme above).

Final Salary Schemes are when you are promised a certain level of pension when you retire. This typically depends on:

• Your salary just before you retire
• The number of years you've been a member of the pension plan
• Your "accrual rate": this depends on your length of service. You get, say, 1/60th of your final salary for every year you've been a member of the pension plan. (If you'd worked for 40 years this would calculate as you getting a pension of 2/3 of your final salary

Tax Benefits For Occupational Pensions

Prior to April 2006 there were various limits placed on what you could contribute into your pension. Since then much simpler, more flexible rules have been introduced to personal and company pension schemes.You can contribute as much as you like into several different company pension schemes every year.

There is no longer any upper limit to the total pension pot amount you can build up. Every year you will get tax relief on your contributions of up to 100 per cent of your earnings. This is subject to an 'annual allowance' above which tax will be charged.