Occupational Pension Schemes
Coverage
Automatic enrolment
- Employers must automatically enrol employees that are of qualifying age (between twenty-two and state pension age) if they earn over a threshold amount.
Opting out
- Individuals may always opt out of occupational schemes. But the individual will still be automatically enrolled into the scheme every three years if they are eligible.
Opting in
- If the employer is not obliged to automatically enrol the employee, they must still let the employee join the scheme if they wish to do so.
Financing
General finances
- Funded through contributions of an employer and/or individual employee and capital revenues.
Contribution rates
- Total occupational pension contributions must be 8% of qualifying earnings; contributions are shared between employer, employee and the state. The employer must contribute a fixed share of 3%, but may opt to contribute more; the state will contribute a fixed share of 1% or higher (depending on the amount of earnings) as pension tax relief; employees must make up the rest and may be able to make additional voluntary contributions depending on the scheme.
State support & incentivising strategies
- Employer contributions may be eligible for various forms of tax relief (depending on a multiplicity of factors) and will not be subject to national insurance contributions.
- Employees will receive full tax relief on their contributions so long as these do not exceed either 100% of their income or the annual allowance. Above this contributions are subject to income tax.
- Various tax reliefs exist for the money accumulated in pension funds.
Administration
- The Pensions Regulator is the state authority that monitors occupational pension schemes.
- Independent governance committees of contract-based schemes can raise concerns over a scheme’s governance with the Financial Conduct Authority.
- A Pension Protection Fund exists to guarantee that pensions are paid to individuals who lose out due to underfunded defined benefit schemes.
Qualifying Conditions
- Defined contributions schemes usually require the individual to have reached the minimum pension age (of 55); defined benefit schemes usually become available between the ages of 60 and 65, granting reduced benefits if claimed earlier.
- The earliest an individual can take their pension is usually 55.
- To take such pensions early the consent of one’s (former) employer will usually be necessary.
- One can take such a pension while still working.
Benefits
Pension payments
- Payments may take the form of an annuity for the rest of one’s life or of a lump sum.
- The benefits offered by such schemes have traditionally been ‘defined benefit’ (DB) or ‘defined contribution’ (DC). The amount received for DB pensions is usually related to the final salary of the individual, whereas the amount received from DC depends on the contributions, the return on investment and the annuity rate.
- New scheme types have been introduced that involve combinations of DB and DC schemes, allowing for only part of the pension benefit to be defined and for employees to switch between the type of benefit received (dependent on the nature of the scheme and, potentially, certain conditions being met).
Taxation and social security contributions
- Recipients are liable to pay income tax on their pension. However, no tax is payable if the annual pension amount is less than one’s personal allowance and a lump sum worth up to 25% of the total pension is usually tax-free.
- One does not have to pay National Insurance contributions on pensions received.
Coverage
Financing
Administration
Qualifying Conditions
Benefits
Automatic enrolment
- Employers must automatically enrol employees that are of qualifying age (between twenty-two and state pension age) if they earn over a threshold amount.
Opting out
- Individuals may always opt out of occupational schemes. But the individual will still be automatically enrolled into the scheme every three years if they are eligible.
Opting in
- If the employer is not obliged to automatically enrol the employee, they must still let the employee join the scheme if they wish to do so.
General finances
- Funded through contributions of an employer and/or individual employee and capital revenues.
Contribution rates
- Total occupational pension contributions must be 8% of qualifying earnings; contributions are shared between employer, employee and the state. The employer must contribute a fixed share of 3%, but may opt to contribute more; the state will contribute a fixed share of 1% or higher (depending on the amount of earnings) as pension tax relief; employees must make up the rest and may be able to make additional voluntary contributions depending on the scheme.
State support & incentivising strategies
- Employer contributions may be eligible for various forms of tax relief (depending on a multiplicity of factors) and will not be subject to national insurance contributions.
- Employees will receive full tax relief on their contributions so long as these do not exceed either 100% of their income or the annual allowance. Above this contributions are subject to income tax.
- Various tax reliefs exist for the money accumulated in pension funds.
- The Pensions Regulator is the state authority that monitors occupational pension schemes.
- Independent governance committees of contract-based schemes can raise concerns over a scheme’s governance with the Financial Conduct Authority.
- A Pension Protection Fund exists to guarantee that pensions are paid to individuals who lose out due to underfunded defined benefit schemes.
- Defined contributions schemes usually require the individual to have reached the minimum pension age (of 55); defined benefit schemes usually become available between the ages of 60 and 65, granting reduced benefits if claimed earlier.
- The earliest an individual can take their pension is usually 55.
- To take such pensions early the consent of one’s (former) employer will usually be necessary.
- One can take such a pension while still working.
Pension payments
- Payments may take the form of an annuity for the rest of one’s life or of a lump sum.
- The benefits offered by such schemes have traditionally been ‘defined benefit’ (DB) or ‘defined contribution’ (DC). The amount received for DB pensions is usually related to the final salary of the individual, whereas the amount received from DC depends on the contributions, the return on investment and the annuity rate.
- New scheme types have been introduced that involve combinations of DB and DC schemes, allowing for only part of the pension benefit to be defined and for employees to switch between the type of benefit received (dependent on the nature of the scheme and, potentially, certain conditions being met).
Taxation and social security contributions
- Recipients are liable to pay income tax on their pension. However, no tax is payable if the annual pension amount is less than one’s personal allowance and a lump sum worth up to 25% of the total pension is usually tax-free.
- One does not have to pay National Insurance contributions on pensions received.
Legal Basis: Pension Schemes Act 2017; Pension Schemes Act 2015; Pension Act 2014; The Occupational Pension Schemes (Charges and Governance) Regulations 2015; The Pensions Act 2014; Pension Act 2008; Pension Act 2004; Finance Act 2004; Pension Act 1995; Pension Schemes Act 1993.