Company Pension Schemes

Company pension schemes run by employers can fall broadly into three categories: 

Salary Related Schemes (where the pension benefit for an employee is linked to the number of years in the scheme and the earnings).  These are generally known as Occupational Final Salary Schemes.  They are governed by Occupational Scheme Rules detailed below.  More on Final Salary Schemes.

Money Purchase Arrangements (where the pension built up is linked to the amount of money that has been saved and built up in the fund).  There are different types such as Occupational Money Purchase Arrangements (governed by Occupational Scheme Rules (see below), Grouped Personal Pension (GPP) arrangements and Stakeholder Pensions, which are governed by their own sets of rules.  Visit the Types of Pension Pages for more on these.

Additional Contribution Schemes (AVC's) - Employers can also, if they choose and already run an Occupational Pension Scheme (either salary related or money purchase), to establish an additional arrangement - where employers and employees are allowed to top up pension schemes to build a larger pension.  An employee may opt not to join such as scheme and do their own Free Standing Additional Voluntary Contribution scheme (FSAVC).  Visit the Types of Pension Pages for more on AVC's.

Occupational Pension Scheme Inland Revenue Maximum Benefits Rules

Pension Simplification Laws started on 6 April 2006 and have broadly simplified much of the old complex rules that applied to company pension schemes.

New Rules After 6 April 2006: 

With Pension Simplification Laws, all pension funds now have the same rules for maximum benefits such as the Annual Allowance for maximum contributions and the Lifetime Allowance for the maximum size pension fund. 

In addition, many existing pension funds, set up before April 2006, have transitional protection where benefits were and are better under the older rules.  These are explained in more depth in the Pension Simplification Centre.

Old Company Pension Rules:  Before 6 April 2006:

There were many rules that governed occupational pension schemes also known as company pension schemes.  They all depended on when the scheme was started and when a member joined the scheme.  It should be noted that the brief introduction below relates to what the Inland Revenue used to allow as maximum benefits.  Specific schemes did not have to offer benefits up to the maximum level - employers were able to structure schemes to a less beneficial level if the costs proved too expensive. 

There were some basic rules that applied to all occupational schemes such as a maximum death in service lump sum life insurance of 4 X final remuneration (salary), a maximum death in service spouses pension of 2/3rd 's of the members projected pension.

Rules regarding maximum pensions and tax free cash depended upon when you joined the company.  There were three regimes depending upon when somebody joined the company pension scheme:

• Before 17/3/87
• Between 17/3/87 & 31/5/89 (Existing Scheme) OR a new scheme before14/3/89
• After 31/5/89 (existing scheme) or a new scheme after 13/3/89

A.  Member joined scheme before 17/3/87:

1. There is no limit to the final remuneration used in a pension or tax free cash calculation.
2. A maximum pension of 2/3rd 's final remuneration can be paid after 10 years service.
3. A maximum tax free cash lump sum can be paid after 20 years service.  This is up to 1.5 X Final Remuneration.
4. There are special calculations required when retiring early.

B.  Member joined an existing pension scheme between 17/3/87 and 31/5/89 OR a new scheme was set up before 14/3/87:

1. There is no limit to the final remuneration used in a pension calculation only.
2. A maximum pension of 2/3rd 's final remuneration can be paid after 20 years service.
3. A maximum tax free cash lump sum can be paid after 20 years service.  This is up to 1.5 X Final Remuneration.  The maximum salary allowed is £100,000.  Therefore, the maximum tax free cash is £150,000.
4. There are special calculations required when retiring early.

C.  Member joined an existing pension scheme after 31/5/89 OR a new scheme was set up after 13/3/89:

1. There is a limit to the final remuneration used in a calculations of THE EARNINGS CAP.   
2. A maximum pension of 2/3rd 's final remuneration can be paid after 20 years service.
3. A maximum tax free cash lump sum can be paid after 20 years service.  This is up to 1.5 X Final Remuneration or 2.25 X the pension.  Subject to the EARNINGS CAP for calculations.
4. There are no special calculations required when retiring early.

New Rules:  Of course, with Pension Simplification, all pension funds have the same rules for maximum benefits and many existing pension funds have transitional protection where benefits were better under these older rules.

EARNINGS CAP

This was introduced in 1989 and places a limit on the maximum salary that can be used for pension and tax free cash calculations.  It was basically introduced to restrict people (particularly Directors of Companies) increasing their salary in the last few years before they retired.   Doing this prevented them from increasing their salary to a level that would mean that they could maximise the calculations for retirement benefits and take all if not virtually all of their pension fund as tax free cash.

Remember, the Inland Revenue give tax benefits when people pay into pension funds but then tax it as income when you retire.  Prior to the earnings cap, some people could arrange to take their whole pension fund as a tax free lump sum, which was not taxable and therefore, no tax revenue for HM Revenue and Customs - hence the introduction of the earnings cap.

The Earnings Caps:

1989/90 - £60,000, 1990/91 - £64,800, 1991/92 - £71,400, 1992/93 - £75,000, 1993/94 - £75,000, 1994/95 - £76,800, 1995/96 - £78,600, 1996/97 - £82,200, 1997/98 - £84,000, 1998/99 - £87,600, 1999/00 - £90,600, 2000/01 - £91,800, 2001/02 - £95,400, 2002/2003 - £97,200, 2003/2004 - £99,000, 2004/2005 - £102,000, 2005/2006 - £105,600

Pension Simplification has replaced the need for an earnings cap with the high limits for Annual Contributions and Lifetime Allowances.