It is a pension scheme set up and administered by a company for it’s employees. It may be contributory – which means that you will pay part of the cost of providing your benefits – or non-contributory, which means that the company will meet all the costs itself. If you are invited to join your employer’s pension scheme, you should almost certainly do so, as your employer will be paying money into it for you and your benefits will be boosted by those extra contributions.
How is my final pension calculated?
That depends on whether it is a defined contribution scheme or a defined benefit scheme.
A)
Defined Contribution Scheme The amounts that you and your employer pay into the scheme are fixed from the outset, usually as a percentage of your pay. You may also pay extra amounts, if you wish. These contributions are invested, to build up your own ‘pension pot’. When you retire, the full sum of money in your ‘pension pot’ will be used to provide your benefits. So, the larger the ‘pension pot’, the higher the benefits that you will receive. Each year, you will receive a statement showing the value of your ‘pension pot’ and an estimate of the benefits that this is likely to provide. You won’t know how much pension you’ll receive until you retire.
B)
Defined Benefit Scheme Your final pension will be fixed from the outset, in accordance with the formula set out in the scheme’s explanatory booklet and rules. Your benefits will not be directly affected by investment returns. Your pension will usually be a proportion of your final annual earnings, multiplied by the number of years that you will have worked for the company before you retire. If you need a larger pension that the Defined Benefit Scheme is offering, you should pay extra contributions, in order to provide yourself with greater benefits.
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