If your employer offers a pension scheme, it’s usually a good idea to join it. Your employer normally contributes and you’ll often get other benefits, such as
- Payments to your dependants when you die
- A pension if you need to retire early through ill health
- Pensions for your dependants when you die
There are three different types of occupational pension scheme: Money purchase, Final salary and Group personal pensions (including Group Stakeholder pensions):
Final Salary
Final salary schemes are also known as “defined benefit” or “salary related” schemes. Employees and/or their employer contribute to the scheme with the promise of a certain level of pension income. The amount of pension payable from such a scheme is dependent upon:
- The length of time served in the scheme (known as pensionable service);
- Earnings prior to retirement (known as final pensionable salary); and
- The scheme's 'accrual rate' - the proportion of salary that is received for each year of service. So, if the scheme has an accrual rate of 60, the member will receive 1/60ths of his final pensionable salary for each year of service completed.
- Fidelity is a leading provider of defined benefit schemes.
Money Purchase
Money purchase schemes are commonly referred to as “defined contribution” schemes. Employers must contribute to any scheme they offer, and employees can make additional contributions. The money is invested, and a “pot of money” is built up for each scheme member, this money is then used to buy an annuity, which will provides a secure and regular income for the rest of your life.. The amount of pension payable is dependent upon:
- The amount of money paid into the scheme (by the member and the employer);
- How well the investment funds perform; and
- The 'annuity rate' at the date of retirement. An annuity rate is the factor used to convert the 'pot of money' into a pension.
New pension rules introduced from 6 April 2006 also apply to money purchase schemes. Fidelity is a leading provider of defined contribution schemes.
Group Personal Pensions (GPP) and Group Stakeholder Pensions
Since April 2001 all companies with five or more permanent employees that do not have an existing pension arrangement must establish either a group personal pension (GPP) or Group Stakeholder pension.
If your employer offers a Group Personal or Stakeholder Pension, you’ll build up your own personal pension, but your employer usually collects your contribution from your wages and passes them on to the pension company. This is not legally speaking an occupational pension, but when this type of scheme is arranged through an employer it may have lower charges, and the employer may make a contribution.
If you leave your employer all the contributions accrued to that date (including those made by you and your employer) will belong to you. The contributions can be left in the group scheme or transferred to another provider.
