What are the options for joining and active membership?
Joining a Scheme
A person can chose whether or not to join their employer’s pension scheme and in some cases they may be automatically enrolled in a scheme. Alternatively they may have their own arrangement such as a Personal Pension Plan.Why should a person join a scheme?
The member should also consider that:
Eligibility Conditions
For an Occupational Pension Scheme the scheme rules define the conditions under which a person is eligible to join the scheme. This could include:
Usually only one offer to join the scheme is made by trustees. If this offer is declined and later the person decides they do want to join, then they may only be allowed to join at the trustees’ discretion. However, all employers must offer at least one workplace pension scheme which complies with the requirements of the automatic enrolment regulations (see below).
Similarly a member may join and then want to leave the scheme even though they are still employed. This is known as "opting-out”. If they later want to re-join the scheme this would be at the trustees’ discretion.
For a GPP the employer will normally tell employees when they qualify for membership.
Additional Voluntary Contributions
The rules of an Occupational Pension Scheme will state the contributions to be paid, this is normally a percentage of salary. Each year the member will receive an estimate of the benefits that will be provided when they retire.
If the member thinks the amount will not be sufficient for them to live on then they have the option to pay Additional Voluntary Contributions (AVCs).
The pension scheme will normally offer a range of investment funds and the member can choose which one to invest their AVCs in.
The member must decide where to invest their AVCs and this will mainly depend on their attitude to investment risk and how many years are left before they are due to retire. The closer they are to retirement the safer they want the investment to be.
Alternatively the member has the option of paying extra contributions into their own personal pension that is not related to their employer’s scheme. The member needs to be aware that they will be paying management charges, which may be paid by their employer in the case of AVCs.
For a GPP, the employer will tell employees what contributions the employer will pay and how much the employees are required to pay.
Salary Sacrifice
Another option for the member may be to participate in a salary sacrifice arrangement offered by the employer.
Salary sacrifice means the member agrees to give up the right to get a specified amount of their salary as cash; in return their employer will provide them with a non-cash benefit such as pension contributions, child care vouchers or contributions to a private medical scheme. The most common non-cash benefit is pension contributions.
The "sacrifice” is achieved by varying the member’s contract of employment.
As salary is being forfeited rather than being paid to the member, there is no tax or National Insurance (NI) contributions to pay. The advantage is that more contributions are paid into the scheme and the member pays lower NI contributions.
However, there are a few points the member needs to consider:
Investment of Scheme Contributions
For a member of a DB scheme there is no choice as to where the contributions are invested. However, a member of a DC scheme does have choices.
A member of a DC scheme will have the option of investing either as Lifestyle or Freestyle and they may wish to seek regulated financial advice before making a decision.
Lifestyle
Traditionally, lifestyling is designed for those who are not financially aware of investment risk or who are uncomfortable about managing their own investments. The scheme manages the investment which would typically be:
Freestyle
This option is designed for those who are interested in investments and understand the risks involved; they also need to have the time and confidence to manage and review their pension investments on a regular basis. It allows members to create their own mix of investments using a combination of funds allowed by the scheme.
Automatic Enrolment
Automatic enrolment started with effect from 1 October 2012 as part of pensions reform in the UK. The start date depended on the size of the payroll but all employers will have an automatic enrolment scheme in place by 2018.
Many people are living longer and retiring without adequate pension provision so this is a way of making sure that certain employees are automatically enrolled in a pension scheme.
Every employer in the UK must meet various obligations and either provide a qualifying pension scheme or alternatively use a scheme from a provider such as an insurance company.
The new law means that every employer must automatically enrol workers into a workplace pension scheme if they:
Contributions are paid by the employee and their employer.
The member does have the option to opt out of the scheme and if they are considering this they should think about how they will manage in retirement if they don’t have any pension savings. If they opt out within a month of their employer automatically enrolling them then they will get back any money that has been deducted from their salary. However, if they leave later then they may not be allowed to get their money back as it will remain invested until retirement.
Automatic enrolment is a continuous process and the member should be aware that if they do leave the scheme they will be automatically enrolled back into it after 3 years from the employer’s staging date, as long as they still qualify.
Death Benefits
When a member dies there may be a lump sum payable and the member has the option of completing a form indicating to whom they would like the lump sum to be paid. This is known as an "Expression of Wish” form. This form is not binding on the trustees as Occupational Pension Scheme benefits are payable at their discretion, however, it does help them decide who should receive any benefits payable and it also helps to speed up the process.
Annual Allowance
The Annual Allowance is the maximum amount of pension savings that can be made in any year into a pension scheme for a member without incurring a tax charge. The member will be subject to the tax charge on any savings in excess of the Annual Allowance.
The current Annual Allowance is £40,000 (2017/18 tax year).However, with effect from April 2015 members with money purchase benefits who flexibly access them in certain circumstances, will trigger the new Money Purchase Annual Allowance (MPAA) of £10,000 in respect of their money purchase savings in a tax year.
The Government intends to reduce the MPAA to £4,000, although it is not clear when this change will be made.If the MPAA is not exceeded, the member retains the standard Annual Allowance for all their pension savings.If the MPAA is exceeded, the member has an alternative Annual Allowance for any other pension amounts in the tax year (these would normally relate to DB arrangements).
Currently the alternative Annual Allowance is £30,000 (2017/18 tax year).
Transfer In
If a member has benefits in a scheme from previous employment they may have the option to transfer them to their new pension scheme.
The old pension scheme will pay over a transfer value which can then be used to provide benefits in the new scheme.
If the new pension scheme is on a DB basis it may provide defined benefits in return for the transfer value. If it does so then the Scheme Actuary will calculate the amount of benefits the transfer value will provide. It depends on the scheme rules but the member will normally be offered either additional pensionable service or additional pension in lieu of the transfer value amount. However some DB schemes only provide benefits on a DC basis for transfer-in.
If the new scheme is on a DC basis, or is a DB scheme that provides DC benefits for transfer-in, the member will be told how the money will be invested and how it is likely to grow.
It is simpler for the member to have all pension benefits under one arrangement but they will need to ensure that will not be worse off. For example, if a member is considering bringing a transfer value from a DB scheme into a DC scheme then they would be giving up a guaranteed level of benefits in return for an unknown amount, they could be much worse off.
If both schemes are on a DC basis then it mainly depends on whether the member thinks the investment funds in the new scheme are likely to perform better than those in the old scheme.
The member may wish to consider taking regulated financial advice before agreeing to transfer benefits into the new scheme. Since April 2015, it has been a legal requirement that where there is a DB to DC transfer and the value is over £30,000 the member must take appropriate financial advice.
SSASs and SIPPsSmall Self Administered Scheme (SSAS)
This is an Occupational Pension Scheme on a DC basis. However, when a member joins they are normally also a Trustee so there are more regulatory duties attached to be a member and there are much broader options for investing contributions. Contributions are made in the name of members but may not be earmarked for them, the benefits are determined by the scheme rules.
Self Invested Personal Pension (SIPP)
This is also on a DC basis but it is not an Occupational Pension Scheme. Contributions are usually earmarked specifically for the member as with a Personal Pension plan but they have wider investment powers.
