Occupational Pension Schemes

PensionsEmployees may be members of an occupational scheme although not all employers offer occupational pensions. Schemes fall into two types.

Defined Benefit (Final Salary)

The scheme provides each employee on retirement with a pension based on their salary.

The pension is usually calculated on an “accrual basis” which means that the employee will receive a fraction of their salary for each year they have been a member.

The scheme may allow the member to commute some of their pension income for a tax free lump sum. The scheme may also provide death benefits if the member dies before retirement and will usually include a pension for a spouse or dependant if the member dies before or after retirement.

Defined Contribution (Money Purchase)

With this type of scheme the employer agrees to pay a certain amount into a pension for each member, who may also contribute an amount out of their earnings if they wish.

On retirement the accumulated fund is used to purchase benefits (pension).

The level of benefits is not guaranteed by the employer and will depend on the size of the final fund.

The arrangement may also provide a lump sum death benefit if the member dies before retirement.

Personal Pensions

Personal pensions are offered by insurance and investment companies.

They are individual pension plans available to almost everyone and the plan is controlled by the plan holder.

Contributions can be made both by the individual and the employer (where applicable).

The contributions into the pension plan go into a tax exempt pension fund and over the term of the plan grow and form an accumulated fund at retirement.

At retirement the accumulated fund is used to purchase an annuity (pension).

Up to 25% of the fund can be taken as a tax free lump sum. The rest the fund is used to purchase an annuity. Tax relief is given to the plan holder on their contributions, this amount depends on which tax bracket they fall into.

Self-invested Personal Pension (SIPPs)

The self-invested personal pension is a form of “individual personal pension” plan offered by specialist providers. Although subject to the same rules as personal pensions the SIPP allows the plan holder a wider range of investments.

The investments include:

  • Stocks and shares
  • Unit trusts and OEK’s
  • Commercial property
  • Insurance funds
  • Cash
  • Currency deposits
  • Futures and options

The range of investments includes commercial property, which means that sole traders and partners / directors can use their SIPP to buy their business property.

How does this work?

Each partner / director would arrange a SIPP. They can put their existing pension arrangements into the SIPP plus add amounts to the pension if required, up to that individuals earned income. Each partner / director would use their SIPP to acquire a defined share of the property.

In addition to using the SIPP assets to buy the property, the SIPP can also borrow an amount upto 50% of the fund value.

For example: if Mr Jones SIPP had a current value of 100K, Mr Jones could borrow a further 50K giving him 150K to purchase a property. Borrowing will be subject to the normal criteria of the lender.

The business must pay a market rent to use the property.

Do I have sufficient pension for my retirement?

Many people move jobs many time during their working life, or may have periods of not working. Review and assessment of your pension plans will identify shortfalls which could be filled, and any excess charges you may be paying.

Please call Jan on 01706 830678 for advice, or use our enquiry form.