What is an Occupational Pension
Updated: May 17
An Occupational pension plan is a retirement savings program, typically funded by employers and overseen by government regulators. Employees earn future income based on the amount of money they invest during their working years.
At their most basic level, occupational pensions are similar to personal pensions because both involve saving money over time in order to receive an income once you stop working.
However, there are several key differences between the two types of pensions that make it important to understand the specific characteristics of your plan and how it works before you retire.
The first step to getting started with an occupational pension plan is understanding what one is and how it works.
Is it different from a Personal Pension?
Occupational pensions are a type of defined contribution (DC) pension scheme. DC schemes are also known as money purchase schemes and they differ from personal pensions in that they don’t guarantee a fixed income when you retire.
In fact, occupational pensions don’t even guarantee that your original investment will be returned to you at retirement. This is because DC schemes invest your contributions along with those of your employer and other members, into different types of investments which include shares and bonds.
Can I contribute to both a Personal and Occupational plan?
First, it’s important to understand what a personal and occupational plan are. A personal plan (also known as defined contribution plan) is one that includes individual accounts for each person covered by your business’s benefits program.
An occupational plan (also known as a defined benefit plan) covers employees under a collective bargaining agreement or works agreement between you and an employee organization. Both types of plans have their own rules that govern contributions, eligibility requirements, vesting schedules and many other factors.
If you’re not sure what type of pension you have or how much money can be contributed on behalf of employees under both plans, talk to your professional adviser about maximizing contributions for all your company’s pension plans.
What are the benefits of contributing to an Occupational plan?
It might sound obvious, but one of the primary benefits of contributing to a workplace plan (which almost all companies that offer plans allow) is that it makes saving for retirement simple.
All you have to do is get your employer to agree to put some of your salary aside into your account—or increase what they’re already putting away—and it’s there for you when you retire.
It saves you from having to do extra saving on top of what would be coming out of your paycheck anyway; in fact, if done right, it could even mean you have more left over each month since some or all of those savings come directly out of your paycheck before taxes.
How does an Occupational Pension work?
One common type of occupational pensions are defined benefit schemes, where pensions are calculated by a set formula – typically based on a proportion of your salary when you retire.
A final salary scheme is likely to be more generous, especially if you’ve been in your job for a long time. As you pay money into these types of pensions throughout your career, they are also known as pay-related or defined contribution schemes.
How much you receive in retirement depends on how much you pay in and how long you’re paying into them for. The risk with these schemes is that if investment returns aren’t as high as expected or if life expectancy changes then benefits may have to be reduced or contributions increased.
Where can I find more information about Occupational Pensions?
To learn more about how Occupational Pension Schemes work, there are plenty of helpful links within these documents for further reading.
You can also use your favourite search engine to find general information about pensions and other useful resources; there are plenty of free guides available from organisations such as The Money Advice Service who offer advice on pensions and savings.
What is an Occupational Pension - The Bottom Line
Pensions were big in another era, but they’re falling out of favor today. The main reasons why are because pensions are expensive to maintain, which means employers don’t offer them as often as they used to, unless they have to by law such as in the UK.
However, you can still find them in government jobs and large organizations that want their employees to stick around for decades. There are pros and cons of working for a company with a pension plan.
The pros include guaranteed income when you retire; lower stress about retirement saving; fewer financial risks if your employer goes bankrupt or loses money on its investments; and more time at home with family when you retire because your employer may provide additional time off before or after retirement.