Group Pensions

Defined Benefit Pension Scheme

This is also known as a final salary pension scheme, where the benefits are related to the employee's earnings at retirement and their length of service. The main features are:

  • The premium paid by an employer can be offset against corporation tax and is not regarded as a benefit in kind
  • The contributions paid by the employee are deducted from their salary before income tax is calculated
  • Pension benefits are subject to annual and lifetime allowances and you may have to pay more tax if these are exceeded.

Defined Contribution Pension Scheme

This is also known as money purchase and can either be an occupational scheme or a group personal pension scheme (including group stakeholder). The main features are:

  • Each employee has an individual pension policy, with their regular pension contributions purchasing units in the chosen pension funds
  • The level of pension benefit is not guaranteed and will be dependent on a number of factors
  • The premium paid by an employer can be offset against corporation tax and is not regarded as a benefit in kind
  • The contributions paid by the employee receive income tax relief at their highest level
  • For occupational schemes, the contributions paid by the employee are deducted from their salary before income tax is calculated.

Salary Sacrifice

An employee can give up their contractual right to future cash remuneration in return for a non-cash benefit, for example a pension contribution or a childcare voucher. The non-cash benefit becomes part of the employee's contractual rights and has to be fully maintained during periods of maternity leave.
This allows both the employer and employee to save national insurance but the following two conditions must be met:

  • The potential remuneration must be given up before it is treated as received for tax or National Insurance
  • The true construction of the revised contractual agreement between employer and employee must be that the employee is entitled to lower cash remuneration and a benefit.

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