In a competing labour market, employers are finding innovative ways to help retain their employees − and workplace retirement schemes are a way of building employee loyalty. Here are some common questions to help demystify what this is all about.
What is a workplace pension scheme?
A workplace pension scheme is a way of saving for your retirement that is arranged by your employer. Some workplace pensions are also referred to as ‘employee’, ‘occupational’, ‘company’ or ‘work-based’ pensions.
A workplace pension is essentially a savings scheme that your employer and you (if applicable) pay into, that will help you build your retirement savings. It is also generally intended as a means of supplementing your state pension.
The value of the plan is dependent on how much is paid into it through regular contributions over the years, and investment performance. The value of the plan is intended to be accessed upon retirement and withdrawn by way of programmed withdrawals or annuities, so an early surrender would not be possible.
Who contributes to workplace pensions?
The employer adds money into your pension scheme by way of regular contributions, often monthly. In some cases, the employee may also add money through contributions that are agreed with the employer to be deducted directly from salary.
Some employers may commit to pay more into your pension if you agree to contribute too. This is known as ‘contribution matching’. In this way, retirement savings accelerate faster.
What are the benefits of workplace pensions to an employee?
The key benefit is that the employer is contributing to help boost the employee’s retirement savings on top of the National Insurance contributions.
When an employee is also contributing to a qualifying scheme, the employee could be eligible for an annual tax credit as announced by the government from time to time.
What are the benefits of workplace pensions to the employer?
As an important additional employee benefit, a pension scheme will help an employer attract and retain the best talent, improving employee commitment and loyalty and naturally boosting the employer’s brand.
In the case of a qualifying scheme, the employer could also be eligible for certain tax deductions as announced by the government from time to time.
How are workplace pension savings put to work?
Workplace pension schemes generally provide access to a product that provides a selection of different investment strategies or funds. In such plans the employee will be able to monitor how the funds that he or she selected are performing and to make changes to the fund selection if necessary.
The key benefit is that the employer is contributing to help boost the employee’s retirement savings on top of the National Insurance contributions
Past performance is not necessarily a guide to future performance. The value of investments and the currency in which the funds are denominated may go down as well as up and may not return the original amount invested.
The scheme and provider of the scheme is normally chosen by the employer. On the other hand, the fund choices are in the hands of the employee. The actual plan, its value and benefits are also owned by the employee.
What happens if an employee changes jobs?
In such a case, the value of the workplace pension would still belong to the employee. However, the employer would stop contributing to the scheme.
If the new employer has an existing scheme in place, the employee may opt to transfer the scheme to another qualifying scheme. Alternatively, the employee may convert the plan into a qualifying Personal Retirement Scheme designed to receive personal contributions only and still be eligible for individual tax credits.
The employee can also stop making further contributions into the plan. However, this will have an impact on the value of the plan and the benefits at retirement age.
When can an employee withdraw from the pension scheme?
At the moment, for a qualifying scheme, in terms of the Voluntary Occupational Pension Scheme rules or the Personal Retirement Scheme rules, pension plan proceeds can start being withdrawn from the age of 61 but not later than the age of 70.
Normally, providers will also stipulate the minimum number of years that a plan would need to be in place prior to taking out any benefits. Income can be taken at retirement in the form of programmed withdrawals or annuities, which means that one can withdraw a regular income, subject to rules applicable at the time.
It’s best for employees to hold off from accessing the pension plan proceeds for as long as they can afford to do so – certainly until they are no longer in full-time employment. This gives more time for the pension plan to grow and for further payments to be made into it.
There is also the possibility of limited lump sum withdrawals that are tax-free, subject to certain conditions being met. These are aimed at ensuring there is an adequate remaining balance in the plan for programmed withdrawals or annuities.
Can I have both an occupational pension and a personal pension?
Yes, absolutely. There are other types of personal pensions beside the workplace variant and you can set up one of these yourself and pay into it alongside your occupational plan.
There is no limit to the number of schemes you can pay into, so it is certainly possible to maintain your own personal pension plan while also contributing to your workplace plan, but keep in mind that there are limits to the amount of tax credit you can get on your contributions.
The current tax credit for personal qualifying schemes and occupational qualifying schemes is set to an annual maximum of €750 (or 25 per cent of a maximum of €3,000 in contributions).
This article is not to be construed as investment advice and has been prepared on our understanding of current legislation, tax laws and Inland Revenue practice at the time of publication. The applicable laws and legislation may change in future. Please consult your tax adviser for confirmation of tax benefits applicable to your circumstances before committing to invest in any pension plan.
Muriel Rutland, CEO, HSBC Life Assurance (Malta) Limited