Company Schemes

Death before Retirement, Under Salary Related Company Pension

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You might be wondering, what if you die before retiring? What will happen to your pension fund? This article will serve as a pension advice article, and will answer these questions.

If you die before you reach retirement, let say for example you are under salary related scheme of company pension, you will be subjected to different situations depending on your status as member.

If you’re a member that has stopped making contributions or in short a deferred member, your dependant will be subjected to fewer rights to your benefits depending on your scheme’s rules.

And sometimes, if you are in a civil partnership or married and the scheme’s offering, instead of Additional State Pension, benefits your dependants will receive refunds of your contributions but without interest.

But if you are an active member, meaning you are continuing your contributions, and depending on your scheme’s rules, your dependants may have the following payable benefits:

  • A lump sum of up to four times of your salary at the time of your death, tax-free of course
  • A refund of all your contributions without interest
  • A pension plan, the amount will be stated on your scheme’s rules, for your dependant.

AVCs and Company Pension Schemes

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Need some company pension advice? Then this article will help you.

Let’s admit it, increasing our pension fund is what we desire, to of course assure ourselves that we have sufficiently large amount of income on our retirement. It’s not that bad, who wants to reach his/her retirement age thinking that he/she still needs to work to have enough income to live properly.

And to do this, you can have Additional Voluntary Contributions or AVCs, which are money-making method that will increase your fund, if you are under a company pension scheme.

AVCs are more helpful to those who have started saving for pension mid-way and later on their careers and their lives. To make sure that they have larger funds, for more benefits that they and their love ones could enjoy, AVCs should be practiced.

AVCs’ advantages aren’t limited to their characteristic of building a higher pension fund, but it has also other advantages like:

  • Chance of either varying the amount of payment or even stopping it.
  • Tax relief on contributions, which certain limits are under Pension Rules of April ’06
  • In most cases, administration charges are much lower compared to investing onto a separate scheme.

Pension Protection Fund and Financial Assistance Scheme

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PPF is the abbreviation used for the Pension Protection Fund. It is a fund used for protecting members like you of a final salary, also known as a defined benefit, company pension scheme. PPF works by paying normal compensation that is based on the amount of your pension, in case the company got bankrupt and your scheme doesn’t have enough funds to cover your pension.

You will receive regular compensation if your company’s scheme and PPF conditions are in harmony. Compensation equal 100 per cent of your pension will be given to you upon reaching your scheme’s retirement age. And if you haven’t reached your schemes retirement age, depending on PPF rules, you may be entitled to regular compensation of 90 per cent of your pension.

How to qualify for financial help from Financial Assistance Scheme or FAS?

If you have lost out on your pension because your scheme ended after January 1, 1997, you may be entitled to FAS if your:

  • Final salary or defined benefit scheme, in some instances, was overwrought because even though your employer still doing business it could not pay your benefits
  • Final salary occupational pension scheme was under funded.

Types of Company Pensions

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When dealing with different pension providers, it is possible that the scheme they offer will vary. Just like with company pension schemes. But even if they are different, they are still categorized into two general types, which are money purchase and final salary scheme.

In money purchase, your pension will be based on the contributions you and your employer have made and the interest that it accumulated. This contribution will create a fund that will be used to purchase annuity on your retirement.

The fund is computed using an annuity rate, which is based on age, gender and the interest rate at that time, making it impossible to predict your possible pension.

Under this, members are protected by a Pension Protection Fund if there is deficit on the fund. Deficit may only occur if there is fraud and/or theft.

While in final salary (or defined-benefit), your pension is based on your salary and the number of years you are under the scheme. So if your salary is fixed and you can assume the number of years you’ll stay under this, you will somehow know in advance your possible pension.

With some providers, you need to wait you reach 65 to take your benefits. Also option of having tax-free lump sum with smaller monthly income is possible under this scheme.

Difference between Company Pension Scheme Types

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What are the two types of company pension scheme? And what are the differences between the two? If these two questions are currently going thru your mind, then good for you, for this article will answer these two questions.

The two types of company pension scheme are money purchase scheme and final salary (or defined-benefit) scheme.

In money purchase scheme, on your behalf, your contributions (and those of your employer) are invested by a professional manager or insurance company. In money purchase knowing in advance the value of your potential pension will somehow be impossible. This is because the value is dependent on the performance of the investment itself.

While in final salary scheme or sometimes referred as defined-benefit, all the money you contribute is placed into a single fund, which will eventually provide for all its retired members. And the value will eventually obtain is based on your salary and your years under the scheme.

Note that under this final salary, it can run out of money, normally when the amount it has promised to pay out in the future – or the amount it has to pay out now – is more than the total value of investment. And when this happens a support is available to compensate its members.

What is Unsecured Pension?

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In a company pension scheme, specifically the money purchase scheme, to provide you pension on your retirement the fund that you as the employee and your employer have raised will be normally used to buy annuity. Annuity is a regular income; you will receive it annually.

But what if you are not yet interested in buying annuity, then you should decide on having unsecured pension for the time being. Also known as income drawdown or income withdrawal lets you obtain income from your fund which continues to be invested in the scheme, until of course you decide to have annuity.

Income drawdown is commonly used by retirees because of the number of advantages if typically offers. Some of these advantages, which are truly hard to resists, are the following:

  • Opportunity to have control over your money while it is invested.
  • Income flexibility. In this advantage, you can vary the period of time when will you take your profits; it can range from monthly to yearly. Even the amount you receive can either between minimum and maximum limits.
  • Opportunity to choose your own death benefits. Not just confined to the normal options that annuity offers as death benefits.

Tax Relief and Pensions

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Did you know you can take advantage of tax relief from the contributions you make to company and personal pension? This means that your contributions will be topped up with extra money from the government. Typically, the higher your tax rate is, the bigger your tax relief will be. For example, if you are a basic tax payer you need to contribute around £80 to see £100 reflected on their pension. On the other hand, individuals with higher tax rate need only contribute £60 to see £100 on their account.

Basic taxpayers automatically get the tax relief since the personal or company pension firm will take care of it for you. The downside to this is that you will need to reclaim the difference between the basic and the higher tax rate when you submit the self assessment tax form. On the other hand, claiming the tax relief is more complicated for individuals with higher tax rates since they will need to submit several documents before the tax relief is finally reflected on their account.

Pensions are one of the few ways you can get tax relief from the government. Unfortunately, there already are rumors saying that tax relief for individuals with higher tax rate will be removed soon. At present, tax relief for those with incomes over £150,000 is fixed at 20% while those with incomes over £180,000 can no longer take advantage of this benefit. So save up today and secure your future. Get pension advice from the experts!

What are the Different Types of Company Pension?

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Although company pension schemes may sometimes vary from company to company, it still typically categorized into two general types. These two types are final salary and money purchase scheme.

In a final salary scheme, the amount of pension fund will be based on two factors: the amount of your salary and the number of years you have been under the scheme.

In some instances under this scheme, you may only take your benefits until you reach 65, but some earlier. Also under circumstances, you may be given the option to take part of your pension as a tax-free lump sum and will receive smaller monthly income.

While in money purchase scheme, your pension will be based on how much you (the employee) and your employee have contributed and the interest that contribution has produced. The fund that this contribution has produced will be used at your retirement to provide your pension, commonly purchasing a regular income or what is called an annuity.

But at some instances, you can have the choice of taking part of your pension as tax-free lump sum, and the remainder will be used to buy annuity.

Note that how much will the fund will provide is computed using an annuity rate. This rate is dependent on factors like gender, age and interest rate at that time.

Company Pension Advice

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If you are looking for advice on Company Pension Schemes and need to see a specialist independent financial adviser, then we can help. Company Pension Scheme advice available nationwide

Our advisers understand the legal requirements you need to meet as an employer and can help you fulfil your obligations in as simple a way as possible.

As an employer you may have to provide your staff with access to a stakeholder scheme and you should enquire if this is the case.

Access requires that the company should consult with its employees on the choice of a suitable stakeholder scheme provider and then notify all eligible employees of its final selection.

The company does not have to contribute to the scheme but it has to provide a facility whereby contributions will be deducted from your pay and passed over to the scheme.

Employer Exemption
All employers must provide access to a stakeholder pension scheme unless they are exempt. The conditions for being exempt are as follows:

  • There are fewer than 5 people employed. All employees count for this purpose, including part-time and non permanent workers.
  • The company offers all employees access to an occupational scheme that they can join within one year of starting work.
  • The company operates a personal pension scheme that meets the following conditions:
    • it is open to all employees except those who are defined as ‘non-relevant’ (this term is explained below)
    • the company contributes at least 3% of basic salary to the personal pension
    • the scheme has no penalties for members who stop contributing or who transfer out to a different scheme
    • the company deducts the employee’s payments and sends them to the scheme if requested to do so.
  • The company has an occupational scheme which is only open to some employees but the rest have access to a personal pension scheme which meets the above conditions.

‘Non-Relevant’ Employees
There are employees to which an employer need not provide access to a stakeholder scheme if he so chooses. These are known as ‘Non-Relevant’ employees who are anyone:

  • whose earnings have fallen below the National Insurance lower earnings limit for at least one week in the last three months;
  • who has worked for the company for less than three months;
  • who is a member of the company’s pension scheme;
  • who is not in the company scheme but was free to join it and declined the offer or opted out;
  • who is excluded by the rules from joining the scheme because they are under 18 or are within 5 years of the scheme’s normal retirement age;
  • who is debarred from joining a stakeholder scheme because of HMRC restrictions (eg the employee does not normally live in the UK).

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Company Pension Schemes

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Types of Company Pension Plan

Although these vary from company to company there are two general types of company pension:
Salary Related Pension Scheme
This is based on the amount of wage you receive and the number of years you have been in the scheme.
Money Purchase Scheme
This is based on how much has been paid into the scheme and how well the money in the scheme has been invested. On retirement the fund is used to buy an annuity which is a regular income for life.

Company Pension Schemes can be funded or non-funded. Non-funded simply means that you don’t pay into the scheme, the company pays your pension contributions for you. The company do achieve tax relief on these payments, and they often use these schemes as a way of attracting employees to their company.

Access to Company Schemes

Since October 2001, it has been compulsory for certain employers to offer eligible employees access to a stakeholder pension scheme.

Access requires the employer to consult with its employees on the choice of a suitable stakeholder scheme provider and then notify all eligible employees of its final selection.

The employer does not have to contribute to the scheme but it has to provide a facility whereby the employee’s contributions will be deducted from pay and passed over to the scheme. If the employee does not want to take advantage of this facility, they should be able to pay by direct debit.

For advice on company pensions or pensions in general call 0800 043 6701