Pension and Retirement Planning
Today (15 September 2017) is Pension Awareness Day. The aim of the day is to promote the need for saving for the future and retirement planning. Whilst I understand it is important to have a pension and I know I should pay more into my pension, unfortunately, it is not a priority for me. The government introduced auto-enrolment for this exact reason as not enough of us save for our future.
Do you know and understand what your pension has to offer?
Not only are we not saving for our future but we are oblivious as to what our pension has to offer. There are three types of Occupational Pension Schemes:
- A Defined Benefit Scheme;
- A Defined Contribution Scheme; and
- A combination of the above two schemes known as a Hybrid Scheme.
Defined Benefit Schemes
In a Defined Benefit (“DB”) Scheme, the benefit that the member will, at retirement, receive from the scheme is fixed at the outset. The most common type of DB scheme is a final salary scheme. In a final salary scheme, the member’s pension is calculated as a percentage of pensionable salary for each year of service. As long as they have contributed to the scheme. A DB scheme could also provide a pension based on the average salary of the member over their working life. Known as a career-average revalued-earnings (CARE) scheme. Death-benefit schemes providing a multiple of the member’s salary on death are also DB schemes.
Defined Contribution Schemes
In a Defined Contribution Scheme, the eventual benefits are unknown until retirement. A specified level of contributions is payable to the scheme from the employer and (normally) the employee. The contributions invested, and a notional account of these kept for each member’s investments in the scheme. On retirement, the total of the contributions paid and the investment returns on these are available to the member to use as they wish. This is subject to restrictions in legislation.
Auto-enrolment and NEST
Auto-enrolment employers can either use a Defined Benefit or Defined Contribution scheme. Alternatively, they can subscribe to the government-established NEST scheme.
Auto-enrolment requires a mandatory minimum employer pension contribution on behalf of those employees who are a member of their employer’s workplace pension scheme. There are stages to this level of contribution. For example, the first stage requires an employer to pay contributions of at least 1% of qualifying earnings. At this stage, the employee makes combined payments of at least 2%. Under the second stage, the total amount of contributions paid by the jobholder and the employer rises. They must be at least 8% of the jobholder’s qualifying earnings.
The minimum contribution requirements do not apply in the case of an employer that sponsors a Defined Benefit scheme. The employer must ensure the scheme provides benefits that meet a minimum statutory standard.
The last staging date for employers to implement auto-enrolment and to comply with the Pension Act 2008 is February 2018.
Other benefits to a pension
Whilst the basic benefit is the right to receive a pension payable at normal retirement age. Other typical benefits are as follows:
Early retirement pensions
To reflect early payment and that the member will receive their pension for longer, these are reduced by an actuarial factor
Ill-health early retirement pensions
It may be necessary for a scheme member to stop work because of ill-health. Many schemes offer pensions to cover this eventuality. The requirements that members must meet vary between schemes depending on the rules. It could depend on whether they need to be too ill to do their own job. Or even be able to ever work again. The amount of the pension may be the benefit of accrued service or have notional future service added) the scheme’s rules.
Retirement pension increases
Once a pension is in payment, the law provides that it must increase by a minimum amount each year. This is to allow for inflation.
Spouses’ or dependants’ pensions
Typically, schemes offer spouse’s pensions of one-half the amount of the pension. This amount received by the main member immediately prior to their death. Some schemes offer pensions to the children of a deceased member, usually until a child has completed full-time education.
Protection for early leavers
An early leaver from an occupational scheme also benefits from statutory protection. If they have completed above two years’ pensionable service, they must become a deferred member in the scheme and receive a preserved pension. The preserved pension must be held in the scheme until they choose to retire.
Early leavers who leave pensionable service with less than two years’ service in a Defined Benefit scheme have two options. The right to receive either a cash transfer sum or a short-service refund lump sum. The latter is subject to tax at a rate of 20%.
Legislation requires that occupational schemes must allow for a member’s benefits to be split if they divorce. The Court will grant a pension-sharing order as part of the ancillary financial proceedings.
Know your policy
Employees and employers should familiarise themselves with the type of pension and the benefits offered by the pension scheme.
Employer’s so that they can advise their employees and because they may need to evoke the benefits under the policy. For example, if an employee has injured themselves at work and is no longer able to do their job or due to long-term ill health or even redundancy.
An employer also needs to be familiar with the terms of the policy and to ensure that the policy is not leaving them open for litigation. For example, in Walker v Innospec Ltd and others, the Tribunal upheld Mr Walker’s claim that Innospec and the pension scheme trustees had unlawfully discriminated against Mr Walker on the basis of his sexual orientation.
Take the time today to get to grips with your pension policy and its benefits.