PRIVATE & OCCUPATIONAL PENSIONS

Many people will have more than just the Basic State Pension benefits.  This section gives a brief explanation of the main types of pension plans, and leads on to show how you can find out what you have and how much you may get from them.

“What types of pension schemes are there?”

There are broadly two kinds of pensions:

·  Defined Benefit schemes. These are schemes where benefits are generally determined by salary and length of service.

·    Defined Contribution schemes.  These are also called Money Purchase schemes, and include Company Schemes, Personal and Stakeholder Pension plans.

 
DEFINED BENEFIT SCHEMES

 “How does a Defined Benefit Scheme work?”

A Defined Benefit Pension Scheme is an effective type of pension scheme as it generally offers you a pension based on your salary and length of service with an employer. For example, your pension at retirement may be based on your final salary or on your earnings over the period of your employment. Either way, this means that you know with some degree of certainty what you will receive when you retire.

You can also commute part of your pension, i.e. take a lower pension in exchange for a tax-free lump sum. This could be up to 25% of the value of the fund used to provide your pension..

A further benefit is that in the vast majority of schemes, your pension will increase each year.

Many Defined Benefit schemes are “contracted out” of the additional state pension.  This means that you will be entitled to a Basic State Pension but not the additional State Earnings Related Pension Scheme (SERPS) or the State Second Pension (S2P). This is because, for the time you are a member the pension scheme itself offers to provide you with at least as good a pension as you would get from these.

OTHER SCHEMES

“What other kind of schemes are there?”   

If you are not a member of a Defined Benefit Scheme, but your employer runs a pension scheme, you have a Money Purchase arrangement.  It could be a Company Group scheme or it could be a Group Personal or Group Stakeholder Pension Plan.

Although there are some differences between them the principle is the same.  Very simply, contributions build up an individual pension fund which is used to give you an income when you retire.  The bigger the fund you accumulate the more you are likely to have as a pension.

When you retire, as well as a pension, you can take up to 25% of your pension fund as a tax-free cash lump sum.

Money Purchase arrangements are called Defined Contribution schemes, as they are based on the employer and/or employee making a set contribution into the scheme.

Typically, a Money Purchase fund will be run by a major pension company and invested in a range of assets such as stocks and shares, property and deposits with the aim of building up the value over time. The choice depends on the pension provider, you and your own attitude to risk.

Some companies adopt a “lifestyling” approach. The “lifestyle” fund invests in stocks and shares initially and as you approach retirement automatically shifts you into lower risk investments in order to safeguard the value of the fund that has built up.

Often, if you have a Money Purchase plan you will be contracted in to SERPS/S2P. This means that you will receive the Basic State Pension and additional State Earnings Related Pension Scheme (SERPS) or the State Second Pension (S2P) as well as a pension from your private pension fund.

One other point to look out for is that very often your pension will be based on your basic pay. Overtime, bonuses and other payments may be included. So if your earnings include a portion that is not basic pay your pension could be less than you think.

PERSONAL AND STAKEHOLDER PENSIONS

 Personal Pensions were introduced in 1988 as a simple, portable solution to saving for retirement.  

In 2001 Stakeholder Pensions were launched.  This took the core design of a Personal Pension, and added some features. For a pension plan to be designated as a Stakeholder Plan it has to be flexible and good value. There are no set up costs or transfer penalties, and the contributions can be stopped and started without charge.  In addition a Stakeholder pension’s management charges are 1% or less per annum.

This means that with a Stakeholder pension nearly all premiums paid are invested in full from day one. There are no hidden policy fees or charges so that if you transfer from one company to another the full value of the fund is available.  This goes a long way to achieving the portability, which the government had originally intended when it introduced Personal Pensions.

More and more employers are setting up Group Stakeholder Plans. A Basic Stakeholder Plan allows employees to make personal contributions through payroll deductions. An enhanced Stakeholder plan may be available, with your employer making a contribution. This can be a valuable benefit.

 “Am I eligible?” 

Anyone is eligible to make payments into a Stakeholder Pension, so long as the total contributions you make to all your pensions do not exceed that year’s salary, then tax relief will be given on the contributions.   This means it is possible to be a member of a company pension scheme and to contribute to a private Stakeholder Pension as well.

“What can the plan invest in?”

There is a wide range of investment funds available to Personal and Personal Stakeholder pensions, from a simple deposit account type of arrangement through government Gilts and Bonds to stocks and shares.  The choice depends on the individual and your attitude to a number of factors such as the degree of risk of the investments.

 “How do I take my pension?”

It is possible to draw benefits from a Personal Pension or a Stakeholder Plan from the age of 55 onwards (50 up to 2010).  Up to 25% of the fund can be drawn as a tax-free lump sum and the balance is used to provide an income.   Your income can be secured through the purchase of an annuity or it can be drawn directly from the fund itself. You do not have to retire to draw money out of your Personal or Stakeholder pension plan.

 What happens if I die before I retire?

Normally if you die before drawing benefits from the plan the full value of the fund goes to your nominated beneficiaries.

This is a very brief outline of the main features of Personal and Stakeholder pensions. If you are considering taking out a Personal or Stakeholder Pension plan you should seek advice from a professional Independent Financial Adviser.

 

Scottish Transport Credit Union Limited
Authorised and Regulated by the Financial Services Authority

This document is for guidance only, and professional advice should be obtained before acting on any information contained herein. We cannot accept any responsibility for loss occasioned to any person as a result of action taken or retained from in consequence of the contents of this publication.