Company Pensions

Clients frequently ask whether to leave their old company pension alone, or whether to transfer it

There are two main types of company pension scheme, final salary pensions and money purchase pensions.

Final salary schemes give you a promise that you will receive a pension at retirement that is calculated from your salary and length of service. You will usually have to pay a contribution, and your employer provides the remaining cost of the pension. Your employer shoulders the risk of providing enough funds to honour the pension ‘promise’.

Money purchase schemes do not give a promise of a fixed level of pension. Instead, both you and your employer will normally make regular contributions, and the pension that you get at retirement will simply be whatever your fund will buy at that time. Both you and your employer know exactly how much you have to pay, but your eventual pension is uncertain.

How safe is my company pension scheme?

Money purchase schemes usually have separate plans earmarked for individual employees, and the funds in these plans are not affected if the employer goes out of business.

Final salary schemes promise that you will get a specified level of pension when you retire. If your employer becomes insolvent before you retire, however, it is possible that there will not be enough money in the pension pot to enable your pension to be paid in full.

When there are insufficient funds and no other resources to top up the pension pot, the Pension Protection Fund may provide some protection. Although this has been widely trumpeted by government, in fact it receives no financial backing from them. It is important to note that your pension is not fully protected by the fund. If you have not started taking your pension income, only the first 90% of your pension is covered, and the spouse’s pension may not be as generous as the scheme would have provided. Additionally, the pension benefit may not increase as fast as the scheme had intended, and there is an upper limit on the pension benefit that can be paid.

Why are final salary schemes being closed?

Employers have become nervous about the cost of providing promises of fixed levels of pension. There are so many matters that can affect the cost of providing a final salary pension, including investment returns, inflation, and general life expectancy of pensioners.

Continuing to fund this type of scheme can cause employers difficulties, particularly when trading conditions are poor.

Many schemes have now been closed to new employees, and even existing employees have often been encouraged to join new money purchase schemes.

Which type of scheme is best?

It is impossible to say. For more advice, contact us. For further information on general pension planning issues, see Individual Pensions.

Pensions Left Behind

For more information visit our Pension Transfers section.