Workplace Pension schemes
Workplace pension schemes, or workplace pensions, are pension schemes that are set up by employers to provide their employees with retirement benefits.
The different types of workplace pensions Workplace pensions may also be known as company pensions and occupational pension schemes.
There are different types of workplace pensions, all of which work in different ways. Sometimes they are referred to by different names, but they broadly fall under three main categories:
- defined benefit pension schemes;
- defined contribution pension schemes; and
- cash balance plans.
Defined benefit pension schemes
Defined benefit pension schemes provide retirement benefits that are based on your earnings and the length of time that you have been a member of the scheme. Each pension scheme defines what is meant by ‘earnings’. This may not be the same amount that is shown on your pay slip.
- Earnings for pension purposes (or pensionable earnings) may not include payments you receive such as overtime, commission, bonuses or other benefits. They may also only be based on a proportion of your wages or salary. Your employer will be able to explain this to you.
- Examples of defined benefit pension schemes include final salary schemes and career average revalued earnings (CARE) schemes.
Defined contribution pension schemes
Defined contribution pension schemes invest the contributions, made by you and/or your employer, in a range of different investments. You may be offered a choice about how your contributions are invested.
The benefits that you receive at retirement depend on:
- how much has been paid in on your behalf (by you and/ or your employer);
- the length of time that it has been invested; and
- how the investments have performed over this period.
Defined contribution pension schemes may also be known as money purchase schemes.
Cash balance plans
Cash balance plans are also known as hybrid schemes, and include parts of both defined benefit and defined contribution pension schemes.
Each type of scheme may provide you with an income in retirement, or a tax-free cash lump sum and an income.