What type of workplace pension is best for your business?
Before you start to set up a workplace pension for auto enrolment, it’s useful to know how different types of pension work.
A workplace pension is an occupational pension that offers your employees retirement benefits. Depending on the type of workplace pension, the scheme will be governed and provide income in different ways, which we've outlined here.
Defined contribution schemes are also sometimes known as money purchase schemes. They're based on the employer and the employee contributing an agreed percentage into a pension pot. The money that's paid in is then put into investments by your pension provider.
The most commonly offered scheme is a defined contributions (DC) pension and Aviva has several types of DC pension available:
The Aviva Workplace Pension scheme is easy to set up with a default investment option and can be managed online.
For more flexible solutions, our contract pensions give members more investment choices. Alternatively, our trust pensions work in a similar way but the pension is run by a board of trustees, rather than the provider.
How is the pension money invested?
While your employees are still in work, the money in their pension pot is usually invested in a mix of stocks, shares and other investments. The aim is to grow the pot before they retire. Note that the value of investments can go down as well as up and employees may get back less than the amount paid in.
Once they retire, the employee can access their pension pot in a number of different ways.
Group Personal Pensions
Group Personal Pensions are a type of defined contribution pension run by a pension provider. Employees join the provider’s personal pension scheme, with the employer gathering member data and contributions which they then pass to the provider.
Scheme members of a Group Personal Pension (GPP) build up a pension pot through employer and employee pension contributions. This pension pot is then invested into a mix of stocks, shares and other investments, with the aim of growing the pot over time.
When they retire, the employee can access the pension pot in a number of different ways.
A master trust is a type of defined contribution pension run by a board of independent trustees to provide workplace pensions for a number of unconnected employers.
Because the trustees act on your behalf – as well as other employers – choosing a master trust means you don’t have to decide who will run the scheme, draw up its own individual rules, or create a trusts deed – the legal document that sets up and governs the scheme.
If you’re happy to pass on responsibilities in this way, arranging your scheme as a master trust could be simpler to administrate, saving you time and money. As the employer, you’ll still be able to make decisions about the level of contributions, how the money in the scheme is invested, and what benefits to offer your members.
Master trusts such as the Aviva Master Trust are regulated by the Pensions Regulator, whose job is to ensure that they are well run and financially secure.
How does a master trust differ from a GPP?
Employees build up a pension pot through employer and employee pension contributions which are invested, and can be used at retirement, in the same way as under a GPP. The trustees of a Master Trust are not necessarily associated with a pension provider, and members do not have policies directly with the provider.
There are also differences in the way tax relief is applied to the two types of scheme. GPP members automatically receive tax relief at the basic rate on their own contributions, but this doesn't apply to most master trusts.
To fully understand how issues such as this could affect you and your employees, we’d recommend that you talk to a professional adviser. They’ll be able to help you decide whether a GPP or a master trust would be best suited to your business. Advisers normally charge for their services.
Defined benefit pension schemes are based around a member's salary and the length of time they've worked for their employer. Unlike defined contribution pensions, the amount of income they produce isn’t based on stock market performance.
What affects the income members could receive when they retire?
- A calculation that takes into account how much the member was earning and how long they were employed with the organisation providing the pension.
- The formula used in making this calculation
- The circumstances under which the income is taken from the scheme
Is this different from a final salary pension scheme?
A final salary pension scheme is a type of defined benefit pension where the scheme members receive a defined benefit based on their final salary. Circumstances like an employee being an early leaver, or taking their retirement benefit due to ill health, would affect the available income.
What protection do defined benefit schemes offer?
The advantage of a defined benefit scheme is that members are protected from investment risk. There's a scheme in place to cover members’ benefits in the case of business failure, known as the Pension Protection Fund. However, this doesn't guarantee that the whole benefit accrued will be paid.
For members whose benefit wasn't in payment when the scheme entered the Pension Protection Fund, 90% of the benefit would be guaranteed – up to a maximum level which changes each tax year.
Find out more about auto enrolment
Auto enrolment doesn’t have to be challenging. We’ve got all the information you need to get up and running with your workplace pension scheme.
Aviva Workplace Pension
Our workplace pension is designed to give you a scheme that’s easy to set up and administer, ideal for your auto enrolment needs.
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