What You Need To Know About A Company Pension Scheme
If you are an employee, you have the right to avail yourself of either of the two types of company pension scheme offered by your company, the final salary scheme (defined benefit plan) and the money purchase scheme (defined contribution plan). The Pensions Advisory is a useful tool in providing information about your retirement options and benefits as a member of the working force. Find Out More About UK Pensions.
Final Salary Scheme
According to the pensions advisory, the final salary scheme or the defined benefit plan is the most common pension option given by government institutions and private companies to their employees as a way to secure their retirement.
The employer and employee both make specific contributions, an amount that can be computed before or after taxes.
Usually, the employer makes higher contributions to the fund. The benefits that the employee can receive will depend on different factors such as amount of salary, length of service in the company, etc. In this company pension scheme, the employee is given a choice to take a lump sum amount or a monthly payment upon retirement. Don’t miss our article about Pension Entitlement And Drawdown.1 It will help you make the right move with your pension scheme.
Advantages of a final salary scheme
In a final salary scheme, the employee can expect a specific amount or benefit upon retirement. Moreover, the longer you work for the company, the larger the benefits you can receive. It is easy to plan and include in your personal budget. It also takes the mystery out of goal-setting for your retirement. We’ve prepared a detailed article with all the information you will ever need on widows pension. Make sure you check it out.
Disadvantages of a final salary scheme
As for the disadvantages of this type of scheme you might forfeit your pension if you leave employment before an agreed period stated by the company. Your employer has the power to withhold your rights to the benefits and do whatever the company wishes with it. If you want to find all the information you need about pension rates, make sure to check our detailed article! The pensions advisory2 strongly urges you to determine the specific rules and conditions of your final salary scheme.
Money Purchase Scheme
The money purchase scheme is gaining popularity among companies nowadays because it incurs lower administration fees for the employers, according to the pensions advisory. Learn why superannuation UK is so important for you. Don’t miss our article that will help you understand it in details!
A company pension scheme offers no specific benefits to the working individual. Instead, the money paid into the pension fund is free from any kind of taxes. A 401k and annuities fall into this category. The employer contributes the same amount of money as the employee does or a fixed value, depending on the agreement on the plan. We have a great article for you with all the information and details about a Pension Transfer. Usually, the money purchase scheme does not offer a monthly payment option upon retirement.
Advantages of a money purchase scheme
In a money purchase scheme, the employee is given a certain amount of control over the way his/her money is invested. You can be involved in any type of business opportunities that you think would maximise the potential value of your pension. You can also borrow your funds and use it as capital for your investment. The higher the risks you are willing to take in business, the higher the possibility that your earnings will gain compound interest.
Moreover, if you can foresee leaving the company in the future, you can move your funds to another type of pension plan. There is also some tax relief3 when you take this kind of scheme. Because of the flexibility of the money purchase scheme as well as its other benefits, the pensions advisory strongly recommends this type of retirement option.
Disadvantages of a money purchase scheme
As for the disadvantages, your money can gain or lose value depending on the performance of your investment as well as inflation-related factors. You have to weigh the pros and cons of the two types of company pension scheme to provide a fool proof way to secure your retirement. On our site you will find all the information so you can find the best pension plan for you!