Active Wealth Limited

Pensions at Work

Although you don’t have to join pension schemes offered through your job, it’s usually a good idea to do so because:

your employer normally contributes; you often get other benefits as well as a pension, such as:

• life insurance which pays a lump sum and/or a pension to your dependants if you die while working for that employer;
• a pension if you have to retire early because of ill health; and
• a pension for your spouse and other dependants when you die.

If you work for a business with fewer than five employees, your employer does not have to offer you membership of any pension scheme. Check what’s available though. Some small employers may offer a scheme anyway.

Not all the pensions offered to you in your job are occupational pensions. Your employer may offer a stakeholder or personal pension through a group personal pension (GPP) arrangement. These pensions are not called ‘occupational pensions’ even though the employer may contribute.

Salary-related occupational Pensions

Your employer may provide a salary related pension scheme. They are also called defined benefit pensions because the benefit (your pension) is worked out using your salary and the length of time you have been a member of the pension scheme.

Usually, the employer contributes to the scheme and there are trustees to look after scheme members’ interests. The scheme trustees and manager, not you, usually make all the investment decisions.

How they work

You build up a pension at retirement that depends on:

• how many years you have been a member of the pension scheme;
• the earnings that your pension is based on (often averaged over the last three years before retirement);
• the proportion of those earnings which you get as pension for each year of membership. The most common are 1/60th or 1/80th of your earnings for each year of membership.

The benefits of these schemes

• the pension is based on your length of membership and salary, so you have a fair idea of how much your pension will be (as a proportion of your earnings) before retirement;
• your employer should ensure there is enough money at the time you retire to pay you the pension
• your employer normally contributes;
• you get tax relief on your contributions;
• scheme investments grow generally free of income tax and capital gains tax;
• your pension benefits are linked to your salary while you are working,so they automatically increase as your pay rises;
• your pension income from the scheme will normally increase each year in line with the RPI (Retail Prices Index) or a set percentage, whichever is the lower.