Understand company pensions – final salary, money purchase, stakeholder…
It is usually in your interest to join an employer sponsored pension scheme as your employer will contribute (with the exception of stakeholder schemes) between 3% (the minimum for group personal pensions) and up to 20% or more of your salary to a final salary scheme.
You will be told how much you must contribute yourself. This can range from 3%-15% of your gross salary. Very few schemes do not require employee contributions and are called ‘non contributory’ schemes.
Final Salary schemes (also known as defined benefit) schemes are based on years of employment and salary at retirement (or date you left the scheme) , and pay a maximum of two thirds of your final salary. In practice, few people achieve this because it requires working for the same employer for around 40 years.
Final salary schemes offer members an accrual rate of 40ths (most generous), 60ths or 80ths (least generous). So, if you earn £100,000 and have done 40 years service in a 60ths scheme, your pension would be as follows:
40/60th x £100,000= £66,666 pa pension.
But with an 80ths accrual rate your pension would be as follows:
40/80ths x £100,000 = £50,000 pa pension
The maximum you can contribute to any pension scheme is determined by the Annual Allowance, which is a complex calculation but essentially you can invest up to a maximum of 100% of your annual salary or £40,000 whichever is the greater – so that usually takes care of most peoples contribution requirements!
Final salary schemes have traditionally been considered to offer a ‘copper bottomed’ guarantee of a pension at retirement, but this is not always the case.
These schemes are only as strong as the sponsoring employer and the company’s commitment to the scheme.
Money Purchase Schemes
Group money purchase (also known as defined contribution) schemes have the same contribution limits as final salary schemes but your contributions tend to bew invested in stock market linked funds, so the value of your pension pot will fluctuate in value and unlike Final Salary schemes are not guaranteed
At retirement, the maximum benefits available from a group money purchase scheme are the same as for a final salary scheme, but the pension is provided in the form of an annuity.
Group Personal Pensions
Group personal pensions (GPPs) are governed by personal pension rules. Ususally emplyers make a percentage contribution of your earnings and you will very often be asked to make a contribution of at least the same amount (known as matching). As withe the pensions above the maximim contribution limit is determined by the Annual Allowance,
Don’t leave your Pension with your old Company it could end up as unbalanced as your old boss!