How does a company pension work?

Most of us are looking forward to the time when we have retired from work and can relax and start doing the things we always wanted to do; whether it is spend more time with the grandchildren, travel or simply enjoy the garden. Whatever it is we need some money to live on. Many people will be relying on their State Pension; however, company pensions may also be an important contribution.

Saving for a pension through an employer can be an easy way of making sure money is stored away regularly.

A common choice is the salary-related option, which is usually an agreed fixed percentage deducted from a wage packet every month. Deposits made in this way can be added to with voluntary contributions, which can boost payouts once retirement age is met. Usually both the employer and employee contribute to the pension fund. Having a contributory pension scheme like this can be an asset to a company and may help with recruitment.

A number of rules need to be considered with these types of schemes – including those on tax relief and the annual allowance. Tax benefits can be gained by saving for a pension in this way – income tax is deducted after the pension contribution is accounted for by an employer.

Should an individual leave the firm they are saving with, they have a number of options, including transferring it to another organisation or a personal pension scheme. It is possible to simply leave the money paid in with the pension company and as long as you make sure they can keep in touch with you the investment will just sit and earn interest. Becoming a deferred member of the scheme is another solution; however this can lead to qualifying for less benefits and entitlements.

Putting the money in a bank or savings account is another avenue to explore. However, this way can be seen as a bigger risk than saving with a ‘proper’ pension as bank interest rates can go up and down and it is possible that you may not get back all the money you have invested.

If you want to know more about company pension schemes why not ask AnswerBank Business and Finance.