There are several types of pension schemes which may be available to you. These include the basic state retirement pension, additional pension, occupational pension, stakeholder pension and personal pension.
Basic State Retirement Pension
This is a flat rate pension which is paid to everyone who has made enough National Insurance Contributions or has enough credits when they reach state retirement age. This is currently 60 for women and 65 for men. It will only be paid in full if you have paid, or have been credited with, contributions for the majority of your working life. If you’ve not made adequate contributions to be eligible for a full pension, you still maybe entitled to a partial pension to qualify in your own right or you may be able to get one based on a spouse’s or civil partner’s contributions.
This gives you a top-up to the basic state retirement provision based on your actual earnings. All employees must contribute towards an additional pension unless they make other alternative arrangements by contributing to an occupational or personal pension scheme which is contracted out of additional pension. From 2002, this was widened to include people who are carers or the long term disabled giving both of these groups the right to accrue an additional state pension even though they are not employees.
They were set up by employers to provide pensions and life assurance benefits for their employees, e.g. paying a tax free lump sum to the dependants of the employee should the employee die before reaching retirement age. There are two main occupational pension schemes – final salary, whereby the pension is a proportion of your salary at or close to your retirement date and is linked to the number of years you have worked for a specific employer and money purchase which is based on the total value on retirement of the money paid into the scheme and on how well the investment has performed.
An employee has the right to leave or join an occupational pension scheme but you should consider things carefully before leaving an occupational pension scheme as it will usually work out better financially than a personal pension scheme. It’s also more difficult to return to the scheme later after you have left to take out a personal pension. If you do decide to leave or decline to join, you would then have to contribute towards an additional or personal pension scheme.
You can take out a personal pension whether you are employed, unemployed or self-employed providing you are aged between 18 and 75. If you are an employee who is a member of an occupational pension scheme, you may be able to take out an additional personal pension plan as well. From April 2006, you can save as much as you like into any amount of pension schemes. This is relevant to both occupational and personal schemes. There is no upper limit to the total amount of pension fund you can accrue although there are certain limits on the amount of tax relief you will get.
A personal pension scheme will provide one or more of the following benefits:
- A pension during retirement which can start from any age between 50 and 75 (rising to 55 by 2010).
- A tax free lump sum on retirement of up to 25% of the pension fund which has been accrued from your contributions and interest and/or bonuses which have been paid out by the pension provider
- A pension which is payable to your widow, widower, civil partner or any other dependants
- Should you die before retirement, a tax free lump sum to your widow, widower, civil partner or other dependants
A personal pension scheme can be contracted out of additional pension. This means you do not pay contributions into additional pension and you won’t receive a top up to your basic state pension unless you are entitled to an additional pension from another employer. If the pension scheme is contracted out of additional pension, HM Revenue & Customs will then make contributions into the scheme. If the pension is not contracted out of additional pension, you will continue to pay your contributions into additional pension and will be entitled to a top up of your basic state pension in addition to your personal pension.
This offers more flexibility than other personal pensions. For example, you can stop paying into the scheme without incurring any penalty charges and restart payments whenever you like. You may also be able to vary the timing and the amount of payments you make into the scheme.
An employer must offer their employees a stakeholder pension scheme if they have worked for them over 3 months unless the employer has under 5 employees or offers an occupational pension scheme which all their employees have access to after one year of beginning work or unless the employer can offer a personal pension scheme which is available to all employees aged over 18. The employer must contribute an amount of at least 3% of an employee’s basic pay and the scheme can’t have penalties for leaving it. The employer also has to deduct the employee’s contributions from their pay if asked to do so.
It is a low cost pension scheme which must meet certain standards and criteria. As well as meeting the same conditions as other personal pensions, the pension provider cannot charge over 1% of the value of an individual’s fund each year for administering the pension.
The Pensions Advisory Service (TPAS) and Financial Services Authority (FSA) offer professional advice on pension options.