Employer pension plans

An employer or occupational pension plan is one that is set up by an employer to provide pension and other benefits for employees. The main advantage of this type of plan is that your employer must make a contribution to it (except PRSAs), even if the contribution is small.

Your employer usually sets up the rules of the pension plan and appoints people called 'trustees' to look after it. You don't pay tax on your contributions and your employer automatically takes your contributions from your salary before working out income tax.

The income you get when you retire depends on whether your employer plan is:

A defined benefit plan; or
A defined contribution plan.

Ask your employer, HR Department or pension trustees for information on which type of pension you have, as there are important differences between the two.

Defined benefit plan

With a defined benefit plan, the pension income and/or lump sum you get when you retire is related to your final salary and years of service with that employer. For example, you might get a maximum of half your salary or two-thirds of your salary after 40 years' service, including the state pension.

With this type of plan, you can predict your pension income, based on your salary and years of service. However, there is no guarantee that your defined benefit plan will not be changed to a defined contribution scheme by your employer in the future and this would affect the benefits you will get.

Defined contribution plan

With a defined contribution plan, you are not promised a percentage of your final salary when you retire. Instead, your pension income depends on the value of your pension fund when you come to retire. The value of your pension fund depends on:

the value of the contributions paid in by you and your employer
the investment performance, or gains and losses, of the pension fund
the amount of fees and charges the pension investment company applies

Most employer plans and all personal pension plans and PRSAs are now set up as defined contribution plans. So the final value of your pension can only be estimated. When you retire, your pension may be less than you expected. So you need to examine the benefit statement that you receive each year from the trustees and regularly review your contributions.

Your employer's plan may allow you to make Additional Voluntary Contributions (AVCs), or buy back missing years, called Notional Service Purchase (NSP) through the group pension scheme if you want to increase your pension fund or benefits.