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This is a very broad search and covers many areas.
There are many types of retirement pension. The most obvious being the State schemes.
The State Retirement Pension is paid to people who have reached pension age (60 for women, 65 for men) who fulfil the National Insurance (NI) contributions conditions. Parliament has passed legislation to equalise pension
age at 65 for men and women. The change will be phased in between 2010 and 2020 and will not affect anyone born before 6 April 1950.
The pension has three main parts: the Basic Pension; Additional Pension based on contributions after April 1978; and Graduated Pension based on contributions between April 1961 and April 1975.
There is also a non-contributory pension for people aged 80 and over as explained later.
The Basic Pension is paid at the same rate to people who fulfil the contribution conditions. (These are explained later). You will receive the full rate of Basic Pension if you have paid or been credited with contributions for most of the years of your working life. If you have not paid enough contributions you may get a partial pension or you may not receive a pension at all. Normally you need to have satisfied the contribution conditions in your own right; but
married women, divorced people, widows and widowers may be able to claim a pension based on their spouse’s or ex-spouse’s record.
The full weekly rates at preset are:
• Single person £ 77.45
• Wife on husband’s contributions £ 46.35
• Married couple on husband’s contributions £123.80
• Married couple if both paid full contributions £154.90
An extra 25p is payable when you reach the age of 80.
If you are a married woman with a full contribution record you can claim the pension of £77.45 when you become 60. If you don’t have a full record then you may receive a partial pension. If you are not entitled to a pension on your
own contributions at the age of 60, or it is less than £46.35 you may be able to claim a pension of up to £46.35 based on your husband’s contribution record once he starts to draw his pension. If your pension is more than £46.35 you
won’t get any extra pension based on his contributions.
As well as the Basic Pension you may be entitled to Graduated and/or Additional Pension based on your contributions, as explained later.
If you are a married woman under 60 when your husband starts to draw his pension then he may be able to claim an additional £46.35 for you as a dependant. But this won’t be paid if you earn more than £54.65 a week (£46.35 if you don’t live with your husband) after the deduction of certain
expenses. Any occupational or personal pension will be counted as ‘earnings’.
If you are receiving at least £46.35 from certain social security benefits this may also mean that your husband does not get the addition. When you reach 60, instead of your husband receiving the addition you can claim a pension
based on your and/or your husband/s contributions.
A married woman of 60 or more may also be able to claim an addition for a dependant husband who is not drawing a pension or another benefit and does not have earnings of more than £54.65 a week. This increase can only be paid
if she was receiving the dependant’s addition with Incapacity Benefit, immediately before drawing the State Pension.
If you are divorced and not entitled to a full Basic Pension you may be able to use your former spouse’s contributions to increase the Basic Pension up to a
maximum of £77.45. You can substitute your former spouse’s contribution record for your own from the start of your working life until your divorce or just for the period of your marriage. If you were divorced before pension age you may need to pay further contributions after your divorce to qualify for a full Basic Pension.
If you are receiving the married woman’s pension and you get divorced you may be able to use these rules to get a full pension. If you remarry before pension age you can’t claim a pension on your former spouse’s contribution record. But if you remarry after pension age you won’t lose a pension based on your former spouse’s contributions.
If you are a woman separated from your husband and you don’t qualify for a Basic Pension of £46.35 or more, you may be able to claim the married woman’s pension when your husband claims his pension.
Divorced and separated people are not entitled to any Graduated or Additional Pension based on their former spouse’s contributions (although under ‘pension sharing’ arrangements it is now possible for Additional Pensions
to be divided as a part of a divorce settlement).
A widow or widower who has reached pension age but doesn’t qualify for the full Basic Pension of £77.45 may be able to use their spouse’s contribution record to qualify for the full Basic Pension. They may also be entitled to Graduated and/or Additional Pension.
Since April 1975, employees aged 16 or over and under pension age have had to pay NI contributions depending on the level of their earnings. Employers also pay NI contributions even if the employee is over pension age. Social security leaflet GL23 gives details of contribution rates and Inland Revenue leaflet CA 01 gives more information about NI for employees.
Someone who is self-employed pays a flat rate contribution each week which counts towards a Basic Pension but not the Additional Pension. See Inland Revenue leaflets CA 02 and CWL2 for more information about NI contributions for self-employed people.
If you are more than 4 months away from pension age you can check whether you have paid enough contributions to get a full pension by completing form BR 19, available from the Pension Service or by ringing 0845 3000 168 (local call rate). Whether you will get a full pension depends on your NI contributions and whether your contribution record has been protected by ‘credits’ and/or ‘Home responsibilities protection’, as explained later.
When the present scheme was introduced in 1948, married women could choose to pay a reduced rate contribution. These contributions do not count towards a Basic Pension. The right to choose to pay reduced contributions
was abolished from 6 April 1977 although women already paying these lower rates could continue to do so under certain circumstances. If you do not work for two tax years you will lose the right to pay these reduced rate contributions.
There are two contribution conditions to qualify for a Basic Pension. It may be useful to know the meaning of the terms working life, lower and upper earnings limits and ‘qualifying years’.
Your working life is the period on which your contribution record is based. This is normally from the start of the tax year 6 April to 5 April in which you became 16 to the end of the year before you reach 60 (women) or 65 (men). Working life is usually 44 years for women and 49 for men.
If you were already over 16 when the NI scheme started in 1948, your ‘working life’ may be shorter.
Since 1975, NI contributions have been paid as a percentage of earnings. The lower and upper earnings limits are weekly amounts that are usually increased every year. For the present year (April 2003 to April 2004) the lower limit is
£77 and the upper limit £595. Someone who earns less than the lower earnings limit does not pay NI contributions and is not building up entitlement to the Basic Pension. In 1999-2000 and previous years the lower earnings limit
was the starting point for paying NI contributions but from April 2000 the starting point has been a new ‘primary threshold’ which is currently £89 a week. Contributions will only be paid on earnings about this level although
those earning between £77 and £89 a week will be treated as having paid contributions for the purpose of their pension record. People do not pay contributions on earnings over the upper earnings limit.
A qualifying year is a year (6 April to 5 April) in which enough contributions have been paid or credited to count towards a pension. Since 6 April 1978, a qualifying year has been one in which you have paid (or are treated as having paid) contributions on earnings of at least 52 times the lower earnings limit. Between 6 April 1975 and 5 April 1978 the level was 50 times the weekly lower earnings limit.
Before 6 April 1975, people paid a weekly stamp. All stamps paid or credited are added up and divided by 50, rounding up any left over, to produce the number of qualifying years. You cannot have more qualifying years than the
number of years in your working life up to 1975.
To qualify for any basic pension someone must have actually paid a certain number of contributions (as opposed to receiving credits) as follows:
either After April 1975 you paid or are treated as having paid contributions in one tax year on at least 52 times the lower earnings limit (or 50 times the limit during the period 6 April 1975 to 5 April 1978) or Before April 1975 you paid at least 50 flat rate contributions.
Second condition
To receive a full Basic Pension about nine out of every ten years in your working life need to be qualifying years. If you don’t have enough qualifying years for a full pension you may get a reduced one or you may not get a pension at all.
Your pension depends on your working life and the number of qualifying years you have. A woman with a working life of 44 years will need 39 qualifying years for a full pension and a man with a working life of 49 years will need 44
qualifying years. If you have been unable to work because of unemployment, sickness or caring responsibilities, your contribution record may be protected by credits or home responsibilities protection as described below.
If you are not entitled to a full Basic Pension you may receive a reduced amount. But the minimum pension that can be paid is 25% of the full Basic Pension. If you don’t have enough contribution years to qualify for 25% or
more of a pension you won’t receive a pension at all. The table at the end of this factsheet should help you to work out how much your pension will be, based on the number of qualifying years you have.
You will receive a credit in place of a NI contribution for each week when you are: unemployed and registered for Jobseeker’s Allowance; unable to work due to sickness or disability; or unable to work because you are looking after
someone who is disabled and you are receiving Carer’s Allowance (formerly called Invalid Care Allowance).
Since April 1983, men aged 60 to 64 who are not paying NI contributions automatically get credits even if they are not ill or signing on as unemployed, unless they are abroad for more than six months during the tax year.
Home responsibilities protection (HRP)
HRP started in 1978. It protects the pension rights of someone caring for a child or a sick or disabled person. You can’t get HRP for any years you spent looking after someone before April 1978. A married woman or widow cannot
get HRP for any tax year in which she was only liable to pay reduced rate NI contributions. HRP can normally only be given if you meet any of the conditions outlined below, or a combination of them, for a whole tax year.
But for the third condition, from 5 April 1988, you will receive HRP if you fulfil the conditions for 48 weeks in the year. The conditions are:
• you get Child Benefit for a child under 16;
• you get Income Support and don’t need to register for Jobseeker’s
Allowance because you are looking after someone;
• you have been looking after someone regularly for at least 35 hours a week who gets Attendance Allowance, Constant Attendance Allowance or the middle or higher level of the care component of the Disability Living
Allowance. (If you are receiving Carer’s Allowance (formerly Invalid Care Allowance) you will normally already be receiving credits towards your pension so will not need HRP).
HRP makes it easier to qualify for a full pension because each year of ‘home responsibility’ reduces the number of qualifying years needed. But the number of qualifying years cannot normally be reduced to below 20.
Example
A carer worked and paid full contributions from 1959 when she was 16 to 1989 when she gave up work to look after her mother. She was still caring for her mother in 2003, when she became 60.
Her pension is worked out like this:
Working life 44 years
Qualifying years needed for full pension 39 years
Number of years of HRP 14 years
Number of qualifying years needed for a full pension after taking away years of HRP 25 years As the individual worked and paid contributions for 30 years she is entitled to a full pension as HRP has reduced the number of qualifying years she needs to 25.
If you qualify for HRP because you get Child Benefit or Income Support you don’t have to claim - it will be given automatically. But you will need to claim if you are looking after someone for 35 hours a week but not receiving Carer’s Allowance, or if you qualify because of a combination of conditions. For years from April 2002 onwards you will need to claim by the end of the third year
following the year in which you are claiming for HRP. Ask for claim form CF 411 from your social security office.
If you are not paying NI contributions, and are not entitled to credits or HRP, you can pay voluntary contributions to protect your pension record. Check
with the local social security office to see if you already have enough contributions without paying voluntary contributions.
If you have paid or been credited with some contributions in a year but not enough to count towards your pension, the social security office should contact you to tell you how much you would need to pay to make up that year’s contributions. If you don’t hear anything by March of the next year, make enquiries at your local office.
There are time limits for paying voluntary contributions. They must be paid by the end of the sixth tax year after the one in which they were due. But you can’t pay backdated contributions for any year in which you were only liable to
pay the reduced married woman’s contribution. See Inland Revenue leaflets CA 08 on voluntary contributions and CA 07 on late contributions.
Before the present NI system started on 5 July 1948 there was a state scheme administered through many different friendly societies. In some cases contributions made before 1948 may count towards a pension now.
The Graduated Pension (also called Graduated Retirement Benefit) is based on graduated contributions paid on earnings between 1961 and 1975. You will receive it when you claim your Basic Pension but it can also be paid at pension age even if you don’t qualify for a Basic Pension. The amount depends on your earnings but average payments are only around £2.50 a week.
A widow can inherit half her late husband’s Graduated Pension, as can a widower as long as both he and his wife were over pension age when she dies.
Your retirement pension may also include some Additional Pension which started in April 1978. From April 1978 to April 2002 this was built up under the State Earnings-Related Pension Scheme (SERPS) but from April 2002 the
State Second Pension (S2P) replaced SERPS. This means that people who retire in the future may receive some Additional Pension under SERPS and some under S2P. In general Additional Pension is related to earnings although
under the new S2P some carers and disabled people who are not earning will be credited into the scheme as explained below. Employees earning more than the lower earnings limit are paying into the Additional Pension unless they are ‘contracted-out’ and contributing to an occupational or personal pension instead. You can’t build up Additional
Pension based on earnings if you are self-employed, paying the reduced married women’s contributions or earning less than the lower earnings limit of £77 a week. When you start to receive your pension the amount of Additional Pension you get will be calculated taking into account any periods
when you were contracted out of the scheme.
The Additional Pension is based on weekly earnings between the lower and upper earnings limits (currently £77 and £595 respectively) from April 1978 until the 5th April before your 60th (women) or 65th (men) birthday. Earnings from past years (other than the year ending before the one you reach pension age) are revalued in line with increases in average earnings. If you reached pension age before April 1999 these revalued earnings will have been divided
by 80 to give yearly amount of Additional Pension. This formula provides a pension based on 25% of earnings between the specified levels. However changes were made to phase in, between 1999 and 2009, a reduction to the amount of Additional Pension people would receive.
The intention was that for people reaching pension age from 2009, the Additional Pension would be based on 20% of their average earnings. However, as explained below S2P provides a more generous pension to people with low or modest earnings.
As mentioned above SERPS has been replaced by the State Second Pension for contributions made from April 2002. Like SERPS it is called an earnings-related scheme but it provides extra pension to certain carers, disabled people and others (who may not actually be earning) and low-paid workers. For this tax year 2003-2004 employees with annual earnings of at least £4,004 but less than £11,200 will be credited into the pension as though they have earnings of £11,200. You may also be treated as though you have earnings
of £11,200 if, throughout the year, you are entitled to Carer’s Allowance (formerly called Invalid Care Allowance) certain disability benefits or Home Responsibilities Protection (HRP) because you are caring for a child under 6 or a disabled person.
Instead of paying into S2P (previously SERPS), people can join a ‘contracted out’ occupational scheme (if their employer runs one) or take out an ‘appropriate personal pension’ or stakeholder pension. It is a good idea to
take professional financial advice before contracting out of S2P.
When a widow starts to receive her retirement pension at 60, or if she is already receiving her pension when she is widowed she can inherit all or some of her husband’s Additional Pension and add it to her own (subject to a
maximum limit). The amount of SERPS a widow can inherit depends on when er husband dies and when he reaches, or was due to reach, pension age (65). f he died by 5 October 2002 or dies after that date but had already reached 65she will inherit the full amount.
People who reach pension age from 6 October 2002 to 5 October 2010 will beable to pass on between 60% and 90% of their SERPS (depending on recisely when they reach pension age). The widow or widower of someone who reaches pension age on or after 6 October 2010 will only be able to
inherit half of their spouse’s SERPS.
These rules for widows also apply to a widower if his wife dies when they are both over pension age. If a man was widowed on or after 8 April 2001, in some circumstances he may be able to inherit his wife’s SERPS if he is under
pension age when he dies.
The maximum amount of State Second Pension (S2P) that a widow or widower will be able to inherit is 50%, regardless of when they were widowed.
If you work after pension age you can choose whether to draw your pension or defer it for up to five years in order to gain increases. You can draw your State Pension even if you work full-time and regardless of how much you earn.
If you are claiming an increase for a dependant husband or wife though, any earnings they have can affect this increase.
The State Pension (including Additional or Graduated pension you receive) is txable, so if you are working and paying tax, your tax code will be adjusted to take into account the amount of pension you receive. Once you reach State Pension age you don’t have to pay NI contributions. You should receive a certificate of exception from the DWP to give to your employer who will still have to pay ontributions for you.
You can choose to defer your pension for up to five years. This means that you don’t draw your pension at age 60 (women) or 65 (men) and that you will earn extra pension. You can only defer your pension for five years, so you
can’t normally defer it after the age of 65 (women) or 70 (men). You will need to tell the DWP of your decision to defer your pension when you reach pension age. If you just fail to make a claim at 60 (for women) or 65 (for men) your pension will only be backdated for 3 months!
If you defer your pension, it will increase by about 7.5% for each year that you do not draw it. (If you were eferring your pension before 6 April 1979, you will have earned less). To get extra pension, you must defer it for at least even weeks. For each week that you defer your pension, it will be increased by 1/7p (one seventh of a penny) for each £1 of pension.
For example in April 2003 someone who had deferred their pension for the full five years would receive about £106 a week instead of receiving the Basic Pension of £77.45.
The Basic, Additional and Graduated Pension are all increased in the same way but you cannot gain increases to an addition you receive for a dependant husband or wife. Time when you receive another social security benefit such
as Widow’s Benefit, will not count towards extra pension.
As a married woman you can gain increases to a State Pension based on your own contributions as explained above. If you are aged 60 to 64 and receiving a pension based on your husband’s contributions, you can defer this to gain an
increase. If you are a married woman aged 60 or over and your husband is deferring his pension, you will not be able to draw the married woman’s pension. Once he does draw his pension you will both be entitled to an increased amount.
You won’t get an increase in the married woman’s pension for any time in which you were receiving a pension in your own right or certain other social security benefits. It may be better not to draw a small Graduated or Additional Pension if your husband is deferring his pension.
If you are under 60 and your husband is deferring his pension, you cannot earn extra pension. This is because you are not entitled to any pension of your own so you are not ‘giving up’ any pension. If your husband was entitled to a dependant’s addition for you, this part of his pension is not increased if he defers drawing his pension.
If you are a widow and your late husband deferred his pension, you will receive the increases that he earned by deferment - as long as you don’t remarry before reaching the age of 60.
If you are a widower, you may also get the increases that your late wife earned by deferring her pension; but only if you were 65 or over when your wife died. These rules were introduced in April 1979, so if your spouse died before then
they may not apply.
Once you start drawing the State Pension you can choose to give it up and defer it instead. You can only do this once. If you are a married man with a wife drawing a pension based on your contributions, her consent may be needed to cancel your pension as she will also have to give hers up too.
People working after pension age will need to decide whether to draw their pnsion or not. If you want to have the extra money to use now the decision is easy. Or you may want to consider whether saving the additional income
and putting it towards retirement would be more beneficial. There are many types of savings and investment schemes and you might like to consult a professional financial adviser. Whether to draw your pension or not may depend on several factors which are not always predictable. These include:
future inflation rates and investment returns; your income tax liability; whether you may be entitled to other benefits after retirement; and your life expectancy.
Over-80s Pension
This is a non-contributory pension of £46.35 for people aged 80 or over who on’t have a Retirement Pension. If you have a Retirement Pension but it is less than £46.35 a week the Over-80s Pension will be paid to bring your pension up to this level.
To qualify for this pension you have to be aged at least 80 and living in the UK when you claim. You must also have lived here for 10 years or more in any 20 year period after your 60th birthday. If you have lived in another European
Union country this may help you satisfy the conditions.
The Over-80s Pension will be counted in full if you receive income-related benefits such as Pension Credit, Income Support, Housing Benefit or Council Tax Benefit.
A claim pack will normally be sent to you automatically about four months before your birthday. This will give you three options. You can ring 0845 300 1084 (local call rate) and make a claim over the phone; or ring that number for
a claim form; or send in a tear off slip to get the claim form.
If you have not received the pack by three months before you reach pension age, you should contact your local social security office or ring 0845 300 1084 (local call rate - but note this number does not deal with general enquiries). If you make a late claim the pension can only be backdated for a maximum of three months.
You will receive details of how much your pension will be. If you think you have been awarded the wrong amount or you disagree with another decision about your pension, you can ask for the decision to be reconsidered or you can appeal. You will be given details about this with the decision.
At the time of writing, people already receiving their pension can choose whether to have their pension paid weekly by order book at the post office or to have payments made directly into a bank account 4 weeks in arrears. The
Government wants to change the system, though, so that by 2005 nearly everyone will have payment directly into an account (this is called ‘Direct Payment’). This change will be phased in between April 2003 and 2005 and people will receive letters giving information about the different types of bank and post office account available. It will be possible to choose one that still enables you to get your money at the post office each week.
Sometimes a change in your circumstances, such as a stay in hospital, will affect he amount of pension you receive. Your pension book or the information sent from the social security office will explain the sort of changes you need to
tell them about.
All parts of the State Pension are taxable. Whether you have to pay income tax and if so how much, depends on your total income and your tax allowance(s). In addition to receiving a pension, many older people are entitled to other benefits such as those which are related to income and
savings - Pension Credit, Income Support, Housing Benefit, Council Tax Benefit or Attendance Allowance or Disability Living Allowance which are intended to help with the costs of illness or disability.
Then there are personal pensions.
A Personal Pension Plan (PPP) is simply a long-term savings vehicle with tax advantages. The aim is build a large a fund as possible which will provide an income in retirement and a tax free cash lump sum.
HOW MUCH CAN I PAY INTO A PERSONAL PENSION?
The maximum that can be paid into a personal pension plan is based on your age at the 6th April and are shown in the following table.
Age at 6th April Percentage allowed against total taxable income
35 or less 17.50%
36 – 45 20.00%
46 – 50 25.00%
51 – 55 30.00%
56 – 60 35.00%
61 – 74 40.00%
The maximum contributions allowed, as shown above, include your own and any employers contributions.
However under new rules you can contribute £300.00 per month if this is greater than the amounts in the above table.
HOW CAN MY CONTRIBUTIONS KEEP PACE WITH INFLATION?
From outset you are able to select an automatic premium increase option.
HOW DO I CLAIM MY PERSONAL INCOME TAX RELIEF?
The pension provider will claim basic rate tax relief on your behalf from the Inland Revenue.
For example, a £200.00 per month contribution will attract £56.41 tax relief thereby increasing your contribution to £256.41 per month.
Higher rate taxpayers, can claim additional income tax relief at the marginal rate. It is not possible for the pension provider to collect this additional amount. Therefore you would need to contact your Accountant or the local inspector of taxes.
CAN I MAKE SINGLE CONTRIBUTIONS?
You can make a lump sum payment into your pension any time subject to Inland Revenue limits.
DOES THE FUND I INVEST INTO GROW FREE OF TAX?
The contributions are invested in a fund that accumulates free of UK tax on investment income and capital gains, although it is no longer possible for pension funds to claim the 10% tax credits on dividends from UK equities.
Nevertheless, the favorable tax environment is still a significant investment advantage.
CAN I STOP MY CONTRIBUTIONS?
The pension that I have recommended allows you to permanently or temporarily stop contributions without penalty, and be started again at a later date. They can also be permanently or temporarily reduced to a lower level.
WHEN CAN I TAKE MY PENSION?
At any age between 50 and 75 years of age.
HOW ARE MY BENEFITS PAID AT RETIREMENT?
Part of the pension can be taken as a tax-free cash lump sum at retirement. This sum must not be more than 25% of the total fund; the balance of the money is used to provide you with an income for life known as an annuity. So if the value of your fund at your chosen retirement age was for example £200,000, you could take £50,000 tax-free and the balance of the fund would be used to provide you with a monthly income for the rest of your life.
WHAT ARE MY PENSION OPTIONS AT RETIREMENT?
At retirement you will have a number of options as to how you are paid your pension income, these can include:
A pension paid to you for life with payments continuing to a spouse at 100%, 66% or 50% on death.
A pension that increases each year in payment, this is known as escalation.
A pension that is guaranteed to be paid out for 5 or 10 years whether you are alive or not.
These choices can be made through your pension provider or with an alternative company, known as an “open market option.”
CAN I TRANSFER MY PENSION PLAN VALUE WITHOUT PENALTY?
Yes and no. This depends on the pension provider. More modern plans tend to have no penalties but older oplans ten to.
WHAT IF I DIE BEFORE RETIRING?
In the event of your death before retirement the full fund value including all the contributions made, the tax relief and the investment growth will be refunded to a beneficiary of your choice.
You should look for a pension with the following features:
Retirement can be at any age between 50 and 75 without penalty.
A company with a superior financial credit rating.
Flexibility regarding your contributions.
The early transfer values shown on the illustrations are high.
100% premium allocation rate on contributions.
The paid up values are high.
There is no discontinuance charge if you wish to stop premiums.
The plan can be converted to a pure stakeholder pension without penalty.
The plan can be transferred to another provider without penalty.
They have demonstrated good historic fund performance.
There is a wide choice of fund managers.
Service levels are good.
Then company schemes
Over half the working population in the UK belong to some form of occupational pension scheme and company pensions form a vital supplement to the state pension.
Types of company pension scheme
There are two types of occupational pension scheme:
defined benefit schemes, which pay an income in retirement which is a proportion of your final salary
defined contribution schemes, which pay an income dependent on how much your contributions grow in value.
Group personal pension schemes and stakeholder pensions can also be sponsored by employers but do not come within the company pension scheme tax rules.
Your entitlements and benefits of membership depend on the type of scheme to which you belong.
As a member of a defined benefit or defined contribution company pension scheme, your contributions will be taken from your pay packet. Your contributions cannot exceed 15% of your earnings but in practice member contribution levels are usually in the range 3% to 5% of earnings. If you earn less than £30,000 a year and aren't a controlling director you can contribute concurrently to a company scheme and a stakeholder arrangement.
Maximum contributions to group personal pension schemes and stakeholder plans are 17.5% of earnings for younger members, increasing to 40% over age 60. But you can pay up to £3,600 a year to a stakeholder scheme irrespective of your earnings level.
All pension schemes now include an upper limit on earnings which qualify for contributions and benefits. In the tax year 2001/02 this earnings cap is £95,400.
Defined benefit schemes
Defined benefit schemes provide a pension based on your salary in the years just before retirement and on your years of membership of the scheme. The maximum pension you can earn is two-thirds of your final year's salary. Most schemes provide an annual pension equal to a proportion of your pay which depends on your years of membership.
It is worth checking how your scheme calculates your final salary. For example, it could be your last year's salary, the best of the last three years or the average of the last five years. Based on this information you may want to look at how you can boost your pension in your final years of employment. You may be able to count overtime, bonuses, commissions and even taxable benefits such as a company car towards your pension and contributions.
Defined contribution schemes
In defined benefit schemes your employer makes an open-ended commitment to guarantee your pension benefits. In defined contribution schemes your pension is based on:
the amount of contribution paid by you and your employers
the investment return achieved
annuity rates in force when you retire
This means that your pension will suffer if investment returns are poor or if the value of contributions is eroded by high inflation in future years. On the other hand you will directly benefit if investment returns are good.
Group personal pension schemes
Group schemes operate like individual personal pensions, but usually offer lower charges. Employers often set up group personal pension arrangements when they do not wish to manage their own schemes.
Just like defined contribution schemes, your benefits are based on contributions made by you and your employer, together with investment returns achieved. However, you gain the advantages of a personal pension in that the policy is written in your own name rather than that of your employer. If you change jobs, you can continue contributions yourself or with help from your new employer. You also have greater flexibility over the age at which you can take your benefits than you would have in a conventional company scheme. On retirement you can choose the form in which you take your pension.
Stakeholder pension schemes
From April 2001 all employers have had to make a stakeholder pension as a default scheme available for staff who do not qualify for the main company scheme. Stakeholder schemes offer an inexpensive savings option and in time may replace defined contribution occupational arrangements. But for most employees, company arrangements of the defined benefit type are likely to remain more advantageous than stakeholder pensions.
Should you join?
It is not compulsory to join your company pension scheme, but if your employer is prepared to make regular contributions for you it is very unlikely that you would get a better deal through an individual personal pension. If, however, you plan to move jobs frequently, and those jobs are not with companies that offer a group scheme, then a stakeholder pension or a personal pension may be worth considering. You should start by asking whether your employer would be prepared to contribute to a personal plan and then seek the advice of an independent financial adviser.
If your company pension scheme is not contracted out of SERPS it may at certain ages be beneficial to take out an additional personal pension, so as to benefit from the contracting-out rebate (see State pensions and contracting out)
Understanding your scheme
Most schemes have a minimum age limit or there may be a waiting period of months or years before you are allowed to join. Your scheme handbook will tell you the benefits of membership-including your entitlements on retirement, death or leaving service and the level of life assurance and disability protection provided through membership of the scheme. It should also tell you what facilities are available for making additional voluntary contributions (AVCs) to boost your pension.
Since the Maxwell affair, UK pension law has been tightened up to protect the rights of members of company schemes. Trustees cannot invest more than 5% of the pension fund into the business of the sponsoring employer and they must produce regular reports on the status and performance of the pension fund.
Also, unless the members agree to a different approach, a minimum number of trustees must be elected by the members rather than appointed by the company. If you wish, you can stand for nomination and election as a trustee of your company pension scheme.
What happens at retirement?
You may be able to take part of your benefit or retirement in cash form free of tax. The amount of cash will depend on the type of scheme, when you joined it and whether it is contracted out of SERPS. The rest of your benefits must be taken in the form of a pension.
In defined contribution schemes, as in personal pensions and stakeholder schemes, your pension will depend on annuity rates, so it pays to shop around and take advice. Timing is critical because annuity rates (which dictate the pension you can buy with your fund) can go up and down--the wrong annuity decision could mean losing potential retirement income.
Retiring early
If you plan to retire early, your pension will be lower for two reasons:
you will have fewer years of service qualifying for pension
your pension will be payable for longer
Leaving your scheme
Benefits can increase dramatically during the last few years of service and the converse is that, for example, retiring five years early could reduce your pension by as much as 25%. Beware of temptations to reduce your working week as you near retirement, unless you can get written agreement that it will not affect your pension entitlement.
If you move to another employer before retirement you have a number of options open to you:
1.leave your pension where it is
2. transfer your accumulated benefits (known as a "transfer value") into your new employer's scheme transfer your benefits into a personal pension, a stakeholder plan or a buy-out bond (also known as a "Section 32 Plan")
There is no hurry to move your benefits-you can do this at any time. If you were in a defined contribution arrangement, group personal pension scheme or stakeholder plan your fund will keep changing in line with investment returns. Transfer values from defined benefit occupational schemes are a more complicated calculation but in principle a larger sum should be available if you transfer later.
Before making a decision, it is best to seek professional advice from an independent financial adviser. If you are approaching retirement and have lost touch with your previous employers-because they have moved, merged or gone out of business-you can trace any "lost" pension by sending your details to the Pensions Schemes Registry, PO Box 1NN, Newcastle upon Tyne, NE99 1NN. Telephone 0191 225 6393/4/8.
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