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Employer Defined Benefit Schemes

Employer Defined Benefit Schemes are the traditional company scheme in which you accrue pension benefits by length of service.

Employer Defined Benefit Schemes are normally a very good deal, indeed they are pretty much a free lunch and the only question that arises is whether additional contributions should be invested with the scheme, or your own personal fund by means of an FSAVC.

Key Features

• You get a pension based on your service and your income.
• Seek to establish what exactly your salary is. In many schemes it will only include your basic, with bouses and overtime being excluded. Check.
• Establish what the accrual rate is for your scheme.
  • 1/60 , one sixtieth of salary for each year of service. Equates to 40/60 = a two thirds pension after 40 years service. Quite a common structure.
  • 1/80 salary plus 3/80 cash. Effectively a 1/60, but many public service schemes describe themselves this way.
  • 1/80 common in the private sector. Amounts to a 50% pension after 40 years.
  • 1/100, 1/120, 1/50, 1/30 - other levels, not common.
• Calculate your scheme benefits using the Defined Benefit Scheme Calculator. If you are a controlling director who wishes to establish maximum benefits find out what they are using theMaxiumum accrual rates calculator- only really relevent for those running an EPP or SSAS, or planning to massively increase their own pension contributions.
• Use the Pensions Audit to see how you stand wrt to pensions overall. This not only takes into account company benefits, but also helps you see if, and how much, extra you should be saving.
• At retirement you can opt to reduce your pension and take some cash. If, for example, you are in a 1/60 scheme then you will get 1.5x your salary as cash, and a pension of 50%. ( You will notice that this equals 40x3/80 cash plus 40/80 pension, hence the comment above).
• Early Retirement may involve taking a reduced pension
• Most schemes will provide an ill health pension if you retire early on health grounds. This will normally amount to the pension that you would have got if you had stayed to normal retirement date. In extreme cases ( terminal conditions) a cash lump sum may be offered.
• Spouses will normally benefit from a lump sum payment 2-3 times salary, plus a pension. If you are not married to your partner consult your trustees to find out their position. Some can be very traditional and fail to recognise unmarried partners.
• Most of the costs of the scheme will be paid for by the employer, but you may be expected to put in 5-6% of your salary, perhaps more ( but if so then the benefits are normally substantial).
• You might hear that you employer is taking a pension holiday. This simply means that the fund managers have done well and that they do not need new money at this time.

The first thing to do is find out what benefits are provided, and what, in monetary terms that means to you. Simple question, is it enough? If so ,great, if not you need to top up the pension, get additional Life insurance, PHI, and perhaps Critical illness

Then find out what happens if you retire early. Will the pension be enough? Use the Moneyweb Pension Audit to find out, and if not, act.

Taxpayer Backed Schemes

These are excellent schemes which offer index linked benefits. They are backed by the taxpayer and include the Armed and Uniformed Forces, Emergency Services, Teachers, NHS,and Local Authority schemes. There are no better schemes. We, the taxpayer, will bail you out.

Topping up benefits

You can use In house schemes or Free Standing Additional Voluntary Contributions.

In house schemes may allow the purchase of added years, or simply build up a fund.

The choice needs discussion, but as a very broad approach would take the view that added years are good if the scheme is index linked, your service is short, and the deal offered looks attractive.

Build up a fund in house if near retirement and the added years option is not suitable.

Consider FSAVC if you are many years from retirement and / or expect to change employers once or twice before retiring. They can also be attractive to those who are on target for a full pension, but who intend to retire early and want to reduce the effect of early retirement penalties. ( Note, if overfunding occurs because you do not retire, or are not penalised, then a tax clawback will occur on the fund).

There is a quick JavaScript on FSAVC to help you compute how much you can contribute to topping up your pension.

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