You can take it with you
Sunday 08 December 1996
With more than eight out of 10 people now believing that the Welfare State is unable to provide adequately for them in retirement, a good company pension could well be the best perk you will be offered.
Occupational pension schemes run by employers fall into two camps, final salary and money purchase schemes.
Final salary schemes are the most common type of company scheme. On retirement employees receive a fraction of their final salary for each year they have worked for their employer. The maximum pension you can receive is two-thirds of final salary.
Most schemes work on a 1/60th basis, which means you will have to be with your company 40 years to receive the maximum pension of two-thirds of your final salary. When you reach retirement you will be given the opportunity of turning part of your pension entitlement into a tax-free cash sum.
Alternatively, your occupational pension scheme may be money purchase. With this type of scheme you pay a certain amount of your salary into the scheme each month, usually 4 per cent of earnings, and your employer contributes an extra 6 to 8 per cent of your earnings.
This money is then invested for you to provide a pot of money when you reach retirement. Your company will usually ask an insurance company to invest the money for you.
The value of your pension pot at retirement will be based on how well your investments have performed and not, as with a final salary scheme, on how much you are earning when you reach retirement or how long you have been in the scheme.
When you come to retire you will be able to take some of the money in your pot as a tax-free lump sum and the rest must be used to buy a retirement income known as an annuity. You can buy the annuity from a number of insurance companies - it does not have to be from the same company as you built up your pension pot with.
Whether your employer operates a final salary scheme or a money purchase scheme you should find out how much pension income you can expect when you retire.
To do this write to the trustees of your company pension scheme and ask for a forecast of how much your annual pension will be at retirement. To find out who the trustees of your pension scheme are, ask your manager or personnel officer.
Those in a money purchase scheme should receive details each year from their trustees, who should tell you how much your pension fund is worth, how the investments are performing and what size of annual pension you should be able to afford with your pension fund.
Members of a final salary scheme need to ask their pension trustees for details of what level of retirement income they are on course for.
Most of us change jobs five or six times during our working lives. When you leave a company pension scheme, so long as you have been in it for at least two years, you will be able to decide what happens to those contributions. If you want your contributions to stay in the existing scheme you should contact the trustees of the scheme to find out the amount of pension you can expect from those contributions at retirement. Alternatively, you may decide to transfer your contributions to your new employer's scheme.
To track down the trustees of your former company pension schemes, contact your old employer and ask for the details. If your former employer has gone out of business contact the Registrar of Pension Schemes (0191-225 6393), which should be able to trace trustees.
Once you have details of all the pension schemes you can expect to receive a pension from when you retire, you can then calculate what your retirement income is on course to be.
If you have contributed to only a few schemes this should be quite easy. But if you have pension contributions in several different types of schemes, you may well need help in working out your projected pension.
Your pension department at work should be able to help you. Alternatively, you could speak to an independent financial adviser but be prepared to pay between pounds 100 and pounds 300.
How members of company schemes will gain control next April
In April next year a new Pensions Act will come into force. This will overhaul occupational pension schemes and should give scheme members more financial security.
One of the changes to be introduced will be the indexing of pension benefits. Broadly, for many people in a final salary scheme, this will mean that when they retire their pension payments will rise in line with inflation (up to 5 per cent) each year. Those in money purchase schemes will also have an index-linked pension.
The new Act is expected to lead to pension scheme members having more say in how their scheme is run.
Pension scheme members will have the right to nominate up to one third of their scheme's trustees.
The Act also raises the state pension age for women to 65 from the year 2020. And pension rights will now be taken into account when a couple divorce.
The role of pension scheme trustees is to be extended to ensure that they monitor the pension scheme closely and keep members in touch with any changes occurring in their scheme.
The Pension Act is expected to have most effect on final salary schemes. Employers offering these schemes could face higher administration and funding costs.
The likely result of this is that a number of employers will switch from offering a final salary scheme to offering a money purchase scheme.
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