Salary Related Pension schemes

A defined benefit scheme is one where both the employer and employee may contribute. The pension calculation is based upon the variable factors of length of service, contribution percentage, employees final salary (or an average of last three years salary) and a employer pensions fraction (typically 3/80^th, 1/60^th).

Many Final Salary Schemes have been closed by employers as the costs have risen and all of the risk of providing the pension payments within these schemes sits with the employer.

A defined contribution scheme is where both employers and employees may contribute. On retirement the employee is provided with a fund with which to buy an annuity. In this situation the risk of retirement sits firmly with the employee as the annuity is dependent upon the current rate of return offered by the current market rates of investment instruments such as government Gilts or Bonds. The current experience is that very low returns are being offered (4.5% to 5%).

For example at retirement you will have built up a pensions pot of money that will allow you to purchase a contract that guarantees a series of payments in exchange for a lump sum investment. Considered to be the opposite of life insurance where a death benefit is paid, an annuity provides a benefit while the insured is alive.

• This is based on average salary over length of career, and contributions made
• Often called the Career Average Related Earnings scheme (CARE).
• Here the risks are reduced as the contributions are made over the working life of the employee.
• These schemes favour employees where inflation is low and the earnings are relatively stable over the career of an employee.
• The new pension scheme within the NHS is a CARE scheme, as is a new scheme just introduced by Unilever.

(“top-ups” paid by the employee)

• Many company pension schemes can be supplemented though the payment of AVCs – Additional Voluntary Contributions.
• Making additional voluntary contributions (or AVCs) allows you to supplement your pension contributions to build up an even larger retirement fund. AVCs attract tax relief on the premiums, but the final benefits are taxed as income
• Most company AVCs offer at least a couple of investment choices: an equity fund, and a cash or deposit fund
• Some schemes may allow for lump sum payments on a once-a-year basis

(available to employers for their employees)

• Established by the government to be a cluster of personal pensions set up by an insurance company for employers to offer to employees
• Each employee has his or her own pension "pot" under the administrative umbrella of the employer, and both employer and employee will normally contribute to the plan
• Like a personal pension, contributions are usually invested in the stock market and the final fund depends on how well the investment has performed. One advantage for those working for a number of PAYE jobs over their working life is that if you move jobs, you can take this pension with you where you go
• The transferability of Group Personal Pensions are a potentially useful feature for people working in a series of PAYE jobs
• The success of these schemes has yet to be fully realised.