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What type of pension do you have? > Workplace Pensions

3. Workplace Pensions

There are three main types of pension you get through work.

  1. Auto Enrolment Pension
  2. Occupational Defined Contribution Schemes
  3. Defined Benefit Pension Schemes

The three main types of Workplace Pensions.

1. Auto Enrolment Pension AE

Auto Enrolment is a mandatory pension that a company has to provide to employees with a minimum contribution being made by both employer and employee (by 2019 this contribution will be 3% by the employer, 5% by the employee).

The idea of AE was to provide a low cost pension to all employees that they didn’t have to set up themselves or give information to be enrolled, and had very low management and running costs. Only eligible jobholders HAVE to be enrolled (those that earn over £10,000 and are aged 22-State Pension Age), however, any entitled workers (earn less than £5824) and non-eligible jobholders (earn more than £5824 but less than £10,000 or are younger than 21 or over the State Pension Age) have the right to join a pension, and the employer has a duty to provide access to a pension (non-eligible jobholders can join the employer’s AE pension).

AE was designed on the principle of paying a % of earnings. Eligible jobholders are allowed to opt out (they will be re-enrolled every 3 years). Employers don’t have to offer AE, they could offer a pension that pays 9% total of basic pay (employer contributes 4%, employee 5%), 8% of total pay if it is more than 85% of total pay (employer 3%, employee 5%), or 7% if based on total pay (employer 3%, employee 4%, 1% coming from tax relief). Like with most things in life you get what you pay for, AE pensions are cheap and therefore provide limited choice of funds (as well as a default fund). Options are best discussed with a financial adviser and you might want to consider salary sacrifice for AE as well as occupational pension contributions contact Cambridge Pensions

2. Occupational Defined Contribution Schemes

Group Personal Pension GPP
  • This is a Defined Contribution Pension.
  • The pension provider is chosen by the employer, however, it is a personal contract between the employee and the pension provider
  • A GPP is very similar to having a Personal Pension (see other section on Personal Pensions) except the employer most likely contributes to this scheme, which they probably won’t with a personal pension
  • GPPs might also require an individual to contribute a certain amount to obtain the employer’s contribution, for example, on a like for like basis
  • The pension provider claims tax relief on contributions
  • If you change jobs a Group Personal Pension normally has the option to convert to a Personal Pension. It will continue to grow even if you don’t contribute (if you don’t make regular contributions there may be a non-contribution charge (deferred charge)).
Executive Pension Plan EPP

These are generally set up so that higher level executives get a different (better or ‘more appropriate’) pension. These are now really of historical interest only but individuals may have plans from pre 2006.

Group Self-Invested Personal Pension Group GSIPP

A Group SIPP is selected and set up by a company, but it is an individual contract with the employee, and hence, the employee can convert it to a SIPP upon leaving the company.

A SIPP is similar to a Personal Pension but offers more flexibility with the investments you can chose.

A SIPP is well suited to somebody who has a financial adviser helping them select funds and make choices, or, they want a lot of options in their own control contact Cambridge Pensions

SIPPs used to be more expensive but some providers now charge no more for a SIPP than a Personal Pension.

The range of assets and funds allowed in a SIPP include;

  1. Commercial property
  2. Some NS&I products
  3. Deposit accounts with banks and building societies
  4. Traded endowment policies
  5. Insurance company funds
  6. Unit trusts
  7. Investment trusts
  8. Government securities
  9. Individual stocks and shares quoted on a recognized UK or overseas exchange

Different SIPPs provide different ranges of options, so check these first.

Some SIPPs accept investment into residential property (generally not allowed to be invested in within pensions) through things such as real estate investment trusts.

SIPPs provide a very flexible range of income options from age 55.

Group Stakeholder Pension GSP

GSPs are Stakeholder Pensions selected by an employer, however, the contract is between the individual (employee) and the pension provider.

Stakeholder Pensions are Defined Contribution Pensions.

The idea was to make these a very affordable pension to purchase and maintain, however, since they were introduced other types of pensions have often become cheaper and offer better options.

However, they still offer low and flexible minimum contributions, capped charges, and a default investment strategy (useful if you don’t have a financial adviser).

Minimum government set standards stakeholder pensions must adhere to;

  1. Limited charges
  2. Flexible contributions
  3. Low minimum contributions
  4. No charges to transfer out
  5. Default investment fund

The provider will offer you a selection of funds to choose from.

The percentage invested in equity is normally higher while you work

If you change jobs you can keep paying into this pension, or, stop paying into it. If you stop paying in it will continue to grow (subject to fund performance) but you might be charged non-contribution charges (known as a deferred fee).

Small Self Administered Scheme SSAS

These are normally for company directors and senior employees.

This scheme must have less than twelve members, and all must be trustees. SIPPs and SSASs have a lot I common, however there are some key differences such as SSASs being able to lend up to 50% of its assets to the sponsoring employer.

Section 32 Policy

These are a particular type of Defined Contribution Pension designed mainly to do two things

  1. Secure the Guaranteed Minimum Pension (GMP) liability from a contracted out Defined Benefit Scheme at least until the individual’s State Pension Age
  2. Transfer the maximum benefits from the ceding scheme to the new (this might mean the member could obtain higher tax free cash, for example).
Targeted Money Purchase Scheme

This is a Defined Contribution Pension that has features of a Defined Benefit Scheme, meaning benefits are calculated much like a defined benefit scheme (i.e. how many years worked and what the final salary was), however, it is a Defined Contribution Scheme, so, the employer needs to be realistic about what money is in the funds, therefore they might have to add to this fund at points to make sure there is enough money to meet projected benefits.

The employer only has to pay out from what is in the underlying fund, which is the key difference with between a Target Money Purchase Scheme and a Defined Benefit scheme

3. Defined Benefit Pension DB

(See Defined Benefit Pension section for a longer explanation).

  • Defined Benefit Pensions (also known as Final Salary Pensions) pay out a secure (guaranteed) income for life that increases every year.
  • Your employer manages this scheme and is in charge of making sure there is enough money in the scheme upon your retirement to provide you with your guaranteed benefits.
  • A typical DB pension would be a 1/80th scheme with a 3/80th contribution, meaning you take the amount of years you have worked for a company and divide it by 80, multiply it by your final salary, then this gives you your income. An additional 3/80ths of your final salary is added as a lump sum.
  • Regarding how much tax free cash you get, this will be determined by the commutation rate (see Defined Benefit Pension for more details).

A Financial Adviser can help to further explain Workplace Penions, contact Cambridge Pensions