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Are Your Company Pensions Sufficient to Provide a Comfortable Living in Retirement? Company pensions are provided by your employers and have, until recently, been fairly generous. These final salary schemes are the best way of securing a decent private pension because your pension is based on the length of your service with the company and the amount of your final salary when you leave your employer. However, the rising costs of providing these schemes and a reduction in the benefits offered by company pensions have meant that most of these schemes are no longer open to new members. In many cases these occupational pension schemes have stopped and employers are offering a defined contribution plan as an alternative to those who are still in the scheme.
The Defined Benefit Plan The defined benefit plan, also known as the final salary scheme, can be contributory or non-contributory. In a contributory scheme you contribute a percentage of your salary (usually between 3% and 6%) to the scheme. In a non-contributory scheme, you don't pay anything to the scheme but the company picks up all the costs relating to the defined benefit plan. A defined benefit plan has many benefits to the employees including:
The majority of final salary schemes are 60th schemes although there are also many 80th schemes which are offered by public sector employers. In the case of the 60th scheme, for each year you are in your company pension scheme your pension entitlement is 1/60th of your final salary. So if you have been in the scheme for 40 years, your pension will be a maximum of (40/60) 2/3 of your final salary. Although you get tax relief at the highest rate on your contributions to the pension scheme, the pensions you receive are taxable income. Most people in company pensions are contracted out of the state second pension (previously State Earnings Related Pension scheme).
The Defined Contribution Plan Defined contribution scheme, also known as money purchase scheme, requires you to purchase an annuity on retirement with the pot of money that is saved on your behalf. This annuity will pay you a retirement income for the rest of your life. The size of your pension pot depends on:
However, unlike the defined benefit plan, your pot is exposed to risks of fluctuating share prices. Your retirement income is not guaranteed. When the stock market is down or the annuity rates are poor, you'll be receiving a low pension. However, if the stock market is up and annuity rates are high, you'll get a good retirement income for the rest of your life. Additional Voluntary Contributions Additional voluntary contributions (AVCs) are a cost effective way to top up your pension fund if you have a company pension scheme. These were offered by all company pension schemes up until April 2006. Some companies may no longer provide AVCs following changes to pension rules in April 2006. The advantages of AVCs are:
Stakeholder pensions are a low cost, flexible and secure option for people who do not already have access to a pension arrangement. The Government introduced it in 2001 to encourage them to save for their retirement. All employers with five or more employees must offer access to a stakeholder pension scheme unless:
Although the employer must offer employees access to a stakeholder pension, they are not legally required to contribute towards the scheme. For further information on stakeholder Pensions, click here. Most private employers no longer offer final salary company pensions. These are very expensive schemes especially when people are living longer after they retire. Companies are now offering the defined contribution schemes which is a cheaper version of company pension. Public employers are still offering defined benefit schemes although it's difficult to know when they too will be under pressure to close them.
Retirement planning helps you get more out of life in retirement |
