Page 4 - Group Insurance and Retirement Benefit IC 83 E- Book

Advance Funding
For most employers and their staff, however, this approach is not attractive. Employees

are not happy with the idea that their security in retirement is going to depend on the
employer being (a) still in existence and (b) making enough profit to pay their pensions.

These employers put away money during their employees‘ working lives, to provide a
fund from which the promised benefits can be paid in the future. Some of the money may

be contributed by the members themselves. In that case, the rate at which they will

contribute is usually also defined. The employer then pays the balance of the cost.

The recommended rate of payment is decided by an actuary, who makes various

assumptions as to what will happen in the future to the members (how long they will live,
how long, on average, their dependants will survive them, and so on), their future rates of

pay and the investment returns that the fund will be able to earn.
These assumptions are reviewed from time to time in the light of actual experience and a

new rate of contribution recommended, if appropriate.

Tax Treatment

Funding in advance for pensions is encouraged by the government, which gives

favourable tax treatment to pension funds. This applies, not just to defined benefit
schemes, but to defined contribution schemes as well. Both employers and scheme

members receive tax relief on their contributions as they pay them. In addition, what the
employer pays is not treated as employee earnings for tax purposes.

Most important of all, the pension fund pays no tax on the investment income that it
makes in the shape of dividend income and capital gains. In return, except for some

limited benefits paid in cash on retirement or death, most of what is paid out as benefits
from pension schemes is taxed under the PAYE system.

To qualify for this tax treatment, a scheme must be approved by the Revenue