Company Pensions – Are They Always A Good Thing?

If you work for an employer who offers a company pension, generally speaking you are quite fortunate.  Company pensions are usually seen as a very good thing.  In some companies, it’s compulsory to join the pension scheme. If it’s optional, you have to decide whether to join it or not. 

So how do you make this decision?

In the first place, you probably need to check on the soundness of the policy.  Up till a few years ago, most company (or occupational) pension schemes were perfectly sound, and joining them was almost certainly your best option.  Recently however there have been some scandals where employees who had paid into a pension fund found it had collapsed and they had nothing to show for their contributions.  If you have this decision to make, you should seek advice about the soundness of both the company and the scheme, and the level of guarantee.

The other question you need to consider is what type of pension scheme is offered.  Company pension schemes can be contributory or non-contributory.  The other main distinction is between “defined benefit” or final salary schemes on the one hand, and “defined contribution” or “money purchase” schemes on the other. 

• If the scheme is contributory your contributions will be taken directly from your salary, before tax.  Normally the contributions are taken through the payroll.  The contributions may well be matched by the employer.

• A final salary or “defined benefit” scheme is usually seen as an excellent option from the employee’s point of view.  You know exactly how much you can count on when you retire, as it is guaranteed.  It’s not such a good deal for the employers, because if the amount in the pot falls short, they have to make up the difference.  For this reason, more and more employers are closing final salary schemes – some to new entrants, others to the entire workforce.  If the latter, existing members will have their contributions frozen, or transferred into another type of scheme.  If the scheme works as it should, your pension will be a proportion of your final salary (according to the number of years you have worked for the company) and will be index-linked.

• With a “defined contribution” or “money purchase” scheme, your contributions go into a fund which is invested.  Your eventual pension will depend on how the fund performs.  So unlike the final salary scheme there is no risk to the employer – all the risk is yours.  When you retire you are obliged to buy an annuity – an investment product that provides an annual income for life.

In most cases it’s a good idea to join a company pension scheme if there is one.  But if you are in doubt, or need help in evaluating the scheme, you should seek the advice of a financial adviser.  In some cases you may be dissatisfied with your company pension and feel you would like to transfer to a personal pension.  This is a big decision so make sure you seek pensions advice from a qualified professional.

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