Pensions

Funded schemes

A funded pension scheme is one in which a capital fund is built up over the years from regular contributions intended to be sufficient, with its income generated, to provide enough money for the pensions as and when they fall due. Projected input to the fund is planned to equal projected outgo. That is the true meaning of funding; but the term, in pensions parlance, usually implies two other features. First, that there is a person or organisation behind the fund (usually the employer) who undertakes to provide, from time to time as recommended by the actuaries to the fund, such further contributions to the fund as will be required to honour pension commitments. Secondly, that the fund itself is outside the disposition of the employer, in other words that the assets of the fund are in the ownership not of the employer but of independent trustees - thus even the bankruptcy of an employer could not cause the fund assets to be diverted to other uses.

Contributions

An occupational pension scheme may be either contributory or non-contributory. Make no mistake over these technical terms, every funded pension scheme requires contributions. But if all the contributions are made by the employer, nothing being required from employees, it is said to be non-contributory, as indeed it is from the employee's point of view. If the employee also has to pay towards the cost it is said to be a contributory scheme.

The state pension scheme is contributory. The Civil Service scheme is non-contributory. Many large employers in the private sector still have non-contributory schemes - and these of course are a particularly valuable 'perk' for employees - but most are now contributory.

The amount that an employer contributes into a pension fund of which you are a member may notionally be thought of as part of your total package of remuneration, for only you and your family can benefit from it. Cases do arise, therefore, where employment at a marginally lower wage from a company that operates a generous pension plan may be preferred to a higher wage with no company pension.

Contributions from employee. In a contributory, benefit-related, pension scheme it is now usual for contribution to be required from members of the scheme at a stated percentage rate of pay. A common rate might be 4% or 5%. From each payment of your wage or salary, therefore, that percentage of pensionable pay will be deducted as pension contributions. These contributions are allowable for tax relief at the top rate of tax payable by the individual, in contrast with NI contributions, which are not allowable for tax relief. To a basic-rate taxpayer each £100 of contribution to an occupational pension plan costs in real terms, therefore, only £70 if he is liable to a top rate of tax of 40%. (now 50% for the over £100,000 earners.


What Benefits Are Provided?

A good occupational pension scheme provides benefits additional to a pension for you at retirement. For example, if after your retirement you should predecease your wife, she may be entitled to a pension for her lifetime, commonly at half the rate of your pension. There will probably also be benefits payable should you die before retirement. These may take any or all of the following forms:

(a) a refund of some or all of your own contributions;

(b) a single tax-free lump sum payment of up to four times your

annual salary;

(c) a pension for your... see: What Benefits Are Provided?


Personal And Business Finance 2017

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