Occupational schemes and personal pensions
How they work
Some occupational schemes are ‘salary-related’. This means you are promised a pension based on your pay and how long you've been in the scheme.
Most other occupational schemes, all personal pensions, and the new national scheme due to start in 2012 are ‘money purchase schemes’. This means you build up your own fund of savings and convert it to a pension at retirement, normally by buying an annuity.
What is an Annuity?
It is an investment where you permanently give up a lump sum and in return get an income usually payable for the rest of your life.
How much?
Salary-related scheme
Typically, a salary-related scheme might give you 1/60th or 1/80th of your pay for each year you have been in the scheme. For example, if your pay is £30,000 and you have 20 years’ membership, you might get 1/60th x £30,000 x 20 = £10,000 pension a year.
Money purchase scheme
In a money purchase scheme, how much pension you get depends on:
- the amount paid in
- how well the invested contributions grow
- what charges the pension company has made, and
- the annuity rate at which you convert the fund into pension.
Tax-free cash
With most schemes, you can swap part of your pension for a tax-free lump sum.
What's a stakeholder pension scheme?
It's a personal pension which meets certain conditions such as low charges and flexible payments.
When are they paid?
In most cases you cannot start receiving your pension before you are 50 (this changes to 55 from 6 April by 2010), and you must take your pension before you are 75. The earlier you start, the lower your yearly pension will be.
Protection for your family
Robert reaches age 65 with a personal pension fund of £70,000. He opts for a single life annuity because it offers the highest income: £4,980 a year. With state pensions, he and his unmarried partner Pam have a joint income of nearly £14,900 a year. Unfortunately Robert dies three years later and his pension dies with him. Pam is left with just her state pension which is topped up by pension credit to about £6,800 a year. If Robert had bought a joint life annuity, their joint income would have been less at around £14,200 a year but after Robert’s death Pam would have had around £8,500 a year to live on including income from the annuity and some pension credit.
Most schemes provide some sort of lump sum pay out if you die before you retire.
If you die before, or often after, retirement most occupational schemes pay pensions to your survivors, but only if they were financially dependent on you, or interdependent (for example, you shared the main household bills). Over the last few years the rules have changed so that most public sector schemes now also pay survivor pensions to your an unmarried partner, provided you have nominated them and various conditions are met (see 'The costly hole in Graham's pension scheme').
If you belong to a public sector scheme, check carefully whether the introduction of pensions for unmarried partners has been backdated and how far. You may be able to buy extra protection for your partner (see 'The costly hole in Graham's pension scheme').
Occupational schemes are not allowed to discriminate on sexual orientation - so if the scheme will pay a pension to an unmarried opposite-sex partner, it must also pay to a same-sex partner. Schemes have to treat registered civil partners in the same way as married couples.
With most money purchase occupational schemes and plans, at retirement you choose whether to buy a single-life annuity (where the income stops when you die) or a joint-life-last-survivor annuity which would provide a pension for a surviving partner.
A pension for your partner [1]
| If you buy this sort of annuity: | You might get this much pension a year [2]: | And if you died your partner would get: |
|---|---|---|
Single-life | £2,088 | £0 |
Joint-life-last-survivor, one-third reduction on death | £1,812 | £1,208 |
Joint-life-last-survivor, no reduction on death | £1,704 | £1,704 |
[1] Level annuity (where the income stays the same each year), based on a man aged 65 and women aged 60 at retirement with a £30,000 pension fund and the man dying first.
[2] Based on rates from Financial Services Authority, March 2009.
