Contract and trust-based pensions – what’s the difference?
Find out the difference between contract and trust-based pensions and the benefits they offer to employers.
Key points
- The schemes are managed and governed differently, one by a pension provider and the other by trustees.
- They offer different investment choices, so you should consider which type of investment would work best for your employees.
- Your responsibilities as the employer are very different – hand over the reins with a contract-based scheme or have more control with a trust-based scheme.
- Both schemes are subject to a charge cap for any default funds used in auto enrolment, but tax relief is applied differently.
When it comes to comparing contract and trust-based pensions, there are lots of differences to consider. To help you understand which type of scheme is right for you, we’ve broken down these differences into bitesize chunks.
Set up and governance
Contract and trust-based pensions are set up pretty differently and can offer you different benefits depending on your business needs.
Contract-based pension
- You’ll set the scheme up, but the provider will run it.
- Each employee will have a contract with a pension provider – this is usually an insurance company like Aviva.
- Regulated by the Financial Conduct Authority (FCA).
Trust-based pension
- You’ll set the scheme up, but it will be managed by a board of trustees.
- The trustees are legally responsible for managing the scheme.
- Regulated by The Pensions Regulator (TPR).
Investment choices
As an employer, you won’t have any responsibility when it comes to choosing the investment funds for either scheme.
Contract-based pension
- The pension provider’s investment team will decide on the fund options for the scheme.
- These schemes offer more fund choices.
Trust-based pension
- Trustees work with advisers to select and keep track of the investment options for the scheme.
- The choice of funds are more tailored, but there tends to be less choice available.
Employer responsibilities and communication
When it comes to your responsibilities, you’ll have more to do with a trust-based pension.
Contract-based pensions are managed by a provider like Aviva, who manage most of the admin.
Contract-based pension
- Less admin for you to complete – the provider handles most of it.
- The provider is responsible for communicating to members.
- Any communications have to be clear, fair and not misleading. These are the FCA’s standards.
- An Independent Governance Committee will check the value for money of the scheme.
Trust-based pension
- You'll have more responsibility for scheme governance and oversight with a trust-based pension.
- Unless you use a master trust scheme you'll need to appoint the trustees and assist them in making sure the scheme is compliant with trust law and pensions legislation.
- The trustees are also responsible for member communications and running the scheme in line with standards set by the Pensions Regulator.
- Trustees should assess the scheme for value for money compared to alternative schemes in the market.
Tax relief and charges
Contract-based pension
- Works with relief at source to apply tax relief.
- Basic rate tax relief is added automatically. Higher rate taxpayers have to claim the rest through their self-assessment tax return.
Trust-based pension
- Usually use a net pay arrangement, so tax relief is applied through payroll.
The charges for both schemes are capped for any default funds used in auto enrolment.
Which scheme is right for you?
Contract-based schemes tend to suit employers who are looking for simplicity and less responsibility when it comes to their workplace pension scheme. Larger companies or employers who want more control over the scheme are more likely to go for trust-based pensions. We recommend speaking to a financial adviser before making any decisions about your workplace pension scheme.
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