Understanding company pensions

If your employer offers a company (‘occupational’) pension scheme, it means the company usually contributes towards your pension. There may also be payments to a spouse, civil partner or dependant when you die.

Types of company pension

Company pension schemes vary from company to company. Your scheme is likely to fall into one of two general types – a ’salary related’ or ‘money purchase’ scheme.

Salary related scheme

In a salary-related scheme the amount you get is based on your salary and the number of years you’ve been in the scheme.

Money purchase scheme

With a money purchase scheme the amount you get is based on how much has been paid into the scheme and how well the money has been invested.

On retirement, your fund is used to provide your pension, usually by buying an annuity (a regular income for life). The amount that you get will depend upon various things such as your age, gender and health and, with some types of scheme, your marital or civil partnership status.

Contributing to a company pension

Company pension schemes usually require you to make a regular contribution based on a percentage of your salary. You may also be able to boost your benefits by making additional voluntary contributions (AVCs).

You get ‘tax relief’ on the money you pay into your pension. This means you pay less tax because your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions).

If you joined your company pension scheme during or after 1989 you were restricted on how much you could put into your company pension scheme.

However, following changes to pension rules in April 2006, you can now save as much as you like into any number and type of pensions (irrespective of age) – and get tax relief on contributions of up to 100 per cent of your earnings (salary and other income) each year, subject to an upper ‘annual allowance’.

Savings above the annual allowance and a separate ‘lifetime allowance’ will be subject to tax charges. These allowances will be restricted if you become unemployed and wish to continue to pay into your pension scheme.