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Company Pension Schemes
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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.
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