It is usually in your interest to join an employer sponsored pension scheme as your employer will contribute a percentage of your salary into the scheme.
It is also usually in your best interest not to transfer out of it!
Defined Benefits (DB) Pensions usually take one of two forms;
1. Final salary
Final Salary schemes are based on the number of 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.
Defined Benefit Career Average Revalued Earnings schemes are based on the number of years of employment and your average salary over that time, revalued for inflation. So very similar to a Final Scheme but not as generous as pension benefits will not increase as earnings increase over your working life. This is not so critical for those people that stay in the same job but those that have been promoted a number of times or see a substantial increase in salary during the later of years of employment will not see the benefit in terms of pension income.
Money Purchase Schemes
Also known as defined contribution schemes have the same contribution limits as Final Salary schemes but your contributions are invested in a range of funds, so the value of your pension pot will fluctuate in value and unlike Final Salary schemes benefits are not guaranteed – your pension will depend upon the performance of your funds during your working life.
At retirement, the maximum benefits available from a money purchase scheme are the same as for a final salary scheme, but the pension is usually provided in the form of an annuity (although Flexi Access Drawdown is becoming more widely available).