Types of workplace pension scheme

Defined contribution schemes are also sometimes known as money purchase schemes. They're based on you, the employer, and your employees contributing an agreed percentage of the employees' salary 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, a contract pension, is easy to set up with a default investment option and can be managed online.

For more flexible solutions, our other contract pensions give members more investment choices. Alternatively, our trust pensions work in a similar way but the pension is run by a trustee board, 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 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 an independent trustee board. The board is responsible for running the master trust scheme, providing workplace pensions for you and other unconnected employers.

Because the trustee board acts on your behalf – as well as other employers – choosing a master trust means you don’t have to decide who will run the scheme or draw up the trust deed and rules – 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 make decisions about the contribution levels and can choose the default investment option. This is where the money is invested if members don't make their own investment choice.

Master trusts such as the Aviva Master Trust are authorised and regulated by the Pensions Regulator, whose job it is to ensure that they are well run and financially secure.

How does a master trust differ from a GPP?

Under a master trust 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. A master trust trustee board is 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. All GPP members, including those who don't earn enough to pay income tax, automatically receive tax relief at the basic rate on their own contributions, however most master trusts operate on a basis which means that only members who pay income tax receive tax relief.

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 (DB) 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?

• 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.