Employer pension schemes
An employer or occupational pension scheme is one that is set up by an employer to provide pension and other benefits for employees. The main advantage of this type of scheme is that your employer must make a contribution to it even if the contribution is small, however if you are paying into a Personal Retirement Savings Account (PRSA), your employer does not have to make a contribution,
Your employer usually sets up the rules of the pension scheme and appoints people called “trustees” to look after it. You don’t pay tax on your contributions. Your employer automatically takes your contributions from your salary, before working out income tax on your remaining income.
The income you get when you retire depends on whether your employer scheme is a defined benefit scheme or a defined contribution scheme.
Ask your employer, HR Department or pension trustees for information on which type of pension you have, as there are important differences between the two.
Defined benefit scheme
With a defined benefit scheme, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years’ service, including the state pension.
With this type of scheme, you can predict your pension income, based on your salary and years of service. However, there is no guarantee that your defined benefit scheme will not be changed to a defined contribution scheme by your employer in the future and this would affect the benefits you will get.
Defined contribution scheme
With a defined contribution scheme, you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you retire and the annuity rates at the time. The value of your pension fund depends on:
- the value of the contributions paid in by you and your employer
- the investment performance, or gains and losses, of the pension fund
- the amount of fees and charges the pension investment company applies
Most employer schemes and all personal pension plans and PRSAs are now set up as defined contribution plans. So the final value of your pension can only be estimated. When you retire, your pension may be less than you expected. So you need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.
Your employer’s scheme may allow you to make Additional Voluntary Contributions (AVCs), or buy back missing years, called Notional Service Purchase (NSP) if you are in the public service, through the group pension plan if you want to increase your pension fund or benefits.