The Different Types Of Company Pensions
Finance March 18th, 2011Money Purchase Schemes
A different title for this program is a defined contribution plan. That’s because the employer contributes a specific amount or percentage of the employee’s wage to the plan. The overall amount the employee receives varies, based how well the plan investments perform. The longer the employee works for the company, the more their pension becomes. The older the employee is at the time of his retirement, the more the pension cheque.
Since many of the money invest in an annuity for an employee at retirement, the prevailing interest charges for these products also make a difference in the amount of money the employee gets. If interest charges are high, the installments will be higher.
Some pension plans enable the employee to make choices such as making payments to a partner in the event of their demise or increasing the amount of money they receive to help offset inflation. These changes also have an effect on the size of the pension cheque.
A newer type of company pension called occupation money-purchase plans permit staff to contribute into the pension also. The guidelines on these types of plan vary from employer to employer. If the employee leaves his place of employment, they have the right to continue the pension or roll it into a personal plan but the company does not continue to make payment into the program.
Since the money the employee gets ties into the investment results, these types of plans lower the company’s risk of poor investment results. Unlike the final wage scheme where the company makes up the shortfall if investment results don’t meet up with the expectation, these plans base the payment on the money available at the time of retirement.
Final Wage Scheme
Final Salary pension plans are no longer popular amongst companies. This form of pension scheme guarantees the employee a specific amount of their final wage. If the economy is in a deep recession and the return doesn’t connect the expectation, then the company has to dig into the company coffers to fund the annuity with enough for that amount.
Certainly, the current dip in the economy made this kind of pension very costly for many of the employers. Some of the larger companies, such as the National Irish Bank are shifting from this type of plan to a money purchase plan. Not only does the economy make a difference. The longevity of the work population also affects the amount the companies need to contribute towards the annuity. Increasing life expectancy simply costs them much more money.
Under Irish law, the employer has to buy an annuity for the employee at the time of retirement. A life insurance company guarantees the fee in exchange for offering the retiring employee a fixed amount for the rest of their life. The amount of the fee the company has to pay for the annuity not only links to the life expectancy of the retiring employee, but also the yields on international bonds. So again, the companies had to pay much more out of pocket money in a time when their business income streams were often lower.
Pension schemes contain many different tax benefits. Because of these complexities, it always pays to seek financial advice from a financial advisor which will help you find one that is right for your company or your personal needs.
