Occupational hazards should not put you off

With company plans, it's simple: if your employer wants to give you money, take it. For those forced to go it alone, the decision is more complex

Many people believe their home is their most valuable asset, but employees approaching retirement may have an even greater asset under their belts - pension rights from their employer, or past employers.

Lots of people in pensionable employment underestimate the value of their pension scheme. The greatest benefit of a company pension scheme is that most of the money is normally put in by someone else - the employer.

Insurance company research indicates that nearly a fifth of earnings needs to be saved throughout the working years to provide a realistic retirement. But the employee's personal commitment is often as little as a 20th of salary. Twice as much, and in many cases even more, is paid by the company.

The employer normally covers the costs of running the scheme, and commonly also offers other benefits, such as a payment for death-in-service (life insurance), health insurance and widow's pension benefits.

Steve Bee, head of pensions at Prudential, the UK's biggest personal pension company, says: "Anyone offered the chance to join a company scheme should grab it with both hands. A pension is effectively deferred income. No one would decline an offer of more income today, so why even think about not accepting it for tomorrow?"

In a typical scheme, around 5 per cent will be deducted from employees' salaries as a pension contribution, with the company paying another 10 per cent. From the fund accumulated, the Revenue allows a maximum pension of two-thirds pre-retirement earnings.

The employee can choose to commute (trade in) part of his or her pension entitlement for a lump sum of tax-free cash worth up to 150 per cent of salary. As a rule of thumb, your pension will be reduced by a pounds 1 for every pounds 9 you take as a lump sum. For example, earnings of pounds 36,000 would allow a maximum pension of pounds 24,000 a year.

By taking maximum cash of pounds 54,000 (pounds 36,000 multiplied by 150 per cent), the pension would be reduced by one-ninth, or pounds 6,000. This leaves a lifetime pension of pounds 18,000 a year.

Occupational pension scheme benefits are usually attributed on the basis of 60ths per year of service. Typically, 1/60th of the final salary is awarded for every year of work for a particular employer. In this case, 40 years' service is needed to automatically reach the two-thirds maximum.

Many government schemes, such as for teachers, work on 80ths. At first sight this may appear less attractive, with the same 40 years' service potentially accruing you a pension of just 50 per cent of salary. But a tax-free cash equivalent to 3/80ths for each year of service is paid on top, so the benefits of both schemes come out the same.

Despite the enormous benefit of company schemes, individuals may still harbour worries about security following scandals such as Robert Maxwell's pension fund plundering. In fact, the fall-out from Maxwell may have given rise to a disproportionate amount of concern. Company schemes are generally well run, and a new Pensions Act has been introduced to allay any remaining fears.

The provisions of the Act, most of which are implemented in April next year, place a heavy responsibility on those running schemes to ensure there is enough money in the pot to meet the promises made. Penalties for getting it wrong will be severe.

Yet, welcome as the protection is, it all costs money. The employee's deal under a salary-linked occupational pension scheme is generally superb, but it is matched by a theoretically unlimited commitment by the employer to pour in money when necessary. If the scheme is underfunded, or investment performance is poorer than envisaged, the company's finances can be hit for six.

Not surprisingly, then, employers are tending to move away from such schemes. Less of a liability to the employer are pension schemes where, instead of giving a guarantee of a pension related to final salary, the pension the employee draws on retirement is a result of the money put in, investment return and the time it has had to grow. The level of pension income is not guaranteed and poor performance will mean a lower pension. Such schemes are generally known as money-purchase.

Some employers have decided to avoid the commitment to a company scheme and the provisions of the Pensions Act altogether by opting for group personal pensions (GPPs).

These schemes can take employer contributions in the normal way, but all individuals effectively have a scheme with their own name on it - their own personal pension.

This type of scheme is very flexible, and many believe it issuitable for employees who switch jobs frequently or who work on contract.

The employee can carry the pension with him from job to job, and although the employee is subject to limits on annual contributions (calculated according to age and salary), there are no Revenue limits on the resulting pension income.

However, the biggest problem facing most employees is not theft or the exceeding of Revenue funding limits, but having enough pension at all. Ron Spill, Legal & General's pension spokesman, says: "With modern job mobility, the idea of doing 40 years in one company pension scheme is completely out of date. Only 1 per cent of all employees will receive the maximum benefits. People who start late or want to retire early from a company scheme face the sobering issue of how to make up the shortfall."

The gap can be enormous - retiring 10 years early can cost as much as 70 per cent of the fund build-up, and five years around 40 per cent.

The most tax-efficient solution to make up some of the potential shortfall is to pay additional voluntary contributions (AVCs), which attract relief against income tax in the same way as contributions to the normal pension plan.

An employee may contribute up to 15 per cent of his annual salary to the main pension scheme and AVC combined. AVCs are available both in-house or free-standing with an outside insurer.

Charges, flexibility and investment performance can vary with both. The charges of in-house schemes are normally subsidised by the employer, but one great advantage of the free-standing option is the ability to save aggressively towards a financial target for early retirement without alerting the boss to your plans.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

A nap a day could save your life - and here's why

A nap a day could save your life

A midday nap is 'associated with reduced blood pressure'
If men are so obsessed by sex, why do they clam up when confronted with the grisly realities?

If men are so obsessed by sex...

...why do they clam up when confronted with the grisly realities?
The comedy titans of Avalon on their attempt to save BBC3

Jon Thoday and Richard Allen-Turner

The comedy titans of Avalon on their attempt to save BBC3
The bathing machine is back... but with a difference

Rolling in the deep

The bathing machine is back but with a difference
Part-privatised tests, new age limits, driverless cars: Tories plot motoring revolution

Conservatives plot a motoring revolution

Draft report reveals biggest reform to regulations since driving test introduced in 1935
The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory