Company Pensions

Pension Statements Type of Schemes Contracted in/out How pensions are paid Commutation

Pension increases Pensions and new employment AVC's Previous company pensions In case of death

If you are leaving your company and taking a pension there are a number of details you might need to confirm.

From 6 April 2006 new rules affect occupational pension schemes. Companies are not obliged to change their rules and will decide which elements of the new legislation they will adopt. Individuals will have new choices to make.

It is recommended that you seek advice from your pensions administrators or from an independent adviser before making any decisions under the new rules.

The total fund value of your pension/s and AVC funds cannot exceed £1.5M. If the fund does, or can be expected to exceed the relevant amount by the time you wish to retire you should consult your pension administrators for advice. The fund value of a final salary scheme is calculated by multiplying your gross annual pension by 20. For money purchase schemes the fund is as quoted by the fund manager.

Up to 25% of your pension fund value may be taken as tax free cash. The fund value is calculated by multiplying your gross pension by 20. A formula is then applied which includes a commutation factor relevant to your age and sex to establish the maximum amount of cash you can take. For AVC funds, 25% of the quoted value can be taken. After taking the cash your pension fund will provide a lower pension. The reduction will depend on your age and on the rules applied by the trustees. You should check how taking the cash affects any dependent's pension.

You may take the cash element of your pension and defer taking the income.

You may continue to work and take your pension

You may contribute up to 100% of your earnings into a pension scheme with tax relief.

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Your Pension Statement
Is all the detail correct and is the pension what you expected?

Check that the your personal details are correctly recorded

Name and address

Date of birth

Date started in service or scheme

Date of leaving

Marital status with name of spouse or Civil Partner and children

Details of bought in service from other company schemes

If you are in a final salary scheme, how is final salary defined? What is excluded, eg. overtime? Is it the whole salary or salary less the Lower Earnings Limit?

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What type of scheme do you belong to?

Final salary

where your pension is calculated by multiplying your years in the scheme by the accrual rate. 
Check the accrual rate in your scheme, eg 60ths per year of service.

Money purchase

where you alone or you and your employer together have put money into a fund. The size of the fund and its investment performance will determine how much pension you receive. The fund can fluctuate in value with stock market movements.
All AVC funds are money purchase.

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Contracted in or contracted out?
Is your scheme contracted in or out of the State Second Pension Scheme, previously known as SERPS?

If you are or were contracted out you will have paid less National Insurance and you will not be paid the additional pension from the state at state retirement age for those years. Your company will pay the equivalent amount as part of the pension it pays you for the contracted out years.

If you were contracted in, the state will pay you Additional Pension for those years.

State make up
In some schemes the pension is reduced when you reach State Pension age and take your State Pension. It means that your income will not increase by very much at State Pension age but effectively you have enjoyed a better pension up to that time.

Check in your pension booklet to see if this applies to your scheme.

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How is your pension paid?
Schemes may pay on the same day as your salary has been paid or there may be a different payment day. Check this in case your bank balance is 'compromised' soon after you leave!

Payslips
Many schemes do not send out payslips every month because of the cost. You may only get one when your pension varies by more than a certain amount from the month before.

Tax office
Check if your tax office will change when you go on to pension.

Changes in your circumstances
Make sure your pension scheme administrators know if you have changed address or marital status. If you change the account to which they transfer the pension, let them know.

Tax
Your pension will be taxed according to the tax code issued by the Inland Revenue. If this is wrong you may pay too much or too little tax. It is up to you to check your coding.

If you have other sources of income make sure the tax allowances are set against your main income. At State Pension age, your tax code will change so that the tax on your State Pension is recovered from your company pension.

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Commutation
In most private sector schemes there is an option to commute part of the pension into tax free cash. For example, if you gave up £1,000 pa gross pension you would receive £10,000 cash. The multiple (in this case 10) varies between schemes and is dependent on your sex and your age when you take it. Your scheme booklet will have a table of 'commutation factors'. There are limits to the amount you can commute.

In most public sector schemes the cash is given automatically and the pension calculated on 1/80th per year of service. Some organisations now allow reverse commutation where cash can be reconverted to pension.

The decision to commute or not is a personal and financial one. Your company cannot usually advise you which is the best route. If you have doubts you should see an independent financial adviser who will help you go through the options. (but see Dependent's pensions)

Calculate the NET pension you will be giving up by taking the cash sum

Can you replace a reasonable percentage of the net income from investing the cash, including drawing down on the capital if needs be?

Can you live reasonably on the reduced net pension plus income from any investment or other sources you have?

Note rule changes from 6 April 2006 regarding tax free cash.

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Pension increases
How is your pension increased each year. Private sector schemes must be increased by a minimum amount by law, usually a minimum of 3% or inflation whichever is the lower. Many private sector schemes also top up the payment to approach or match inflation. The top ups are at the discretion of the trustees of the scheme and are not automatic. You should be able to see a record of increases if you ask.

If your scheme is contracted out of the State Second Pension, your company will make increases on most of your pension but the S2P element (known as the GMP or Guaranteed Minimum Pension), will be linked to RPI by the government once you reach State Pension age.

Most public sector schemes are RPI linked.

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If you are going to another job
You can continue to work and still receive your pension. All income is added together for tax purposes and you are taxed accordingly. There is no tax disadvantage in getting extra income - the more you earn, the more you get even though it is taxed!

If you have left your company but take on some other paid work either as an employee or self employed, you are entitled to contribute to a company pension scheme if there is one or to personal pension plan based on your earnings.

Depending on your age, personal pension schemes may allow more money to be invested than a company scheme but if there is a company final salary scheme they are considered excellent value and should not normally be rejected as the employer also contributes a large amount to your fund. The contributions in either case are tax deductible.

You can contribute up to 100% of your earnings into a pension scheme or put up to £3600 into a scheme if you are not earning

Before you take out a pension, it is worth seeking advice on alternatives.

A pension attracts tax relief when you pay in but tax is paid on the income when you take it. In money purchase schemes, the amount of pension you will get will depend on the annuity rates at the time you take it, the way the fund has performed and therefore the size of the fund at retirement. You will be able to take out up to 25% of the capital invested but income you take from the rest will be taxable.

Funds invested in, say, an ISA, would be from taxed income, they would grow in a similar tax regime to the pension fund but you would have access to the cash at retirement to provide tax free income in whatever form you decide at the time.

Advice should always be sought as to whether a personal pension or some other form of investment is best in your own circumstances, ie age, time to retirement, flexibility of the investment, likely returns etc.

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Additional Voluntary Contributions
If you join a company pension scheme but would like to improve the amount you will receive in pension, you can consider making Additional Voluntary Contributions (AVCs). This may be a scheme provided by your employer or one of your own choice - Free Standing Additional Voluntary Contributions, (FSAVCs).

If you take out a FSAVC with an insurance company, there will be costs for setting up the scheme. If you take out AVCs through your company provider, the costs may be lower or the company may pay them for you.

Under AVC schemes, you save towards a lump sum which will become available to you. 25% can be taken as a tax free sum. You may be able, in some circumstances, to defer taking all or part of the annuity.

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Pensions from previous employers
If you have deferred pension/s from previous employers get a statement from them indicting what pension might be payable, when it can be paid, if there are any commutation rights, in other words the same questions you ask of your current company scheme. Legislation now allows greater flexibility in the treatment of preserved pensions than may have been the case when you left the scheme.

If you have lost track of the company with whom you had the pension, they have ceased to trade or have gone bankrupt you can still find the pension from one of the following addresses.

The Pension Tracing Service
Tel 0845 6002537
www.thepensionservice.gov.uk

Note - rule changes from 6 April 2006 will apply to these pensions as well

You can also get help from an independent financial adviser or through some Citizens Advice Bureaux.

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In case of death
Check that the beneficiaries you have nominated in both your current and previous pensions are still according to your wishes. This is especially important if your personal circumstances have changed, perhaps due to marriage, entering a civil partnership or divorce. The 'Expression of Wish' or 'Nomination' form should be filled in. This indicates to the trustees who you wish to benefit from any payments due from the pension fund in the event of your death. You can change it at any time.

Dependents pensions
When a pensioner dies, the surviving dependent will normally receive a dependents' pension. In most schemes this is 1/2 of the employee's pre-commutation pension. (See also the 5 year guarantee)

NOTE. In most schemes it does not affect dependants' pensions if you commute and take a cash sum, but check your own scheme - there are some variations.

This pension will normally be paid to a spouse and sometimes to a partner. Some schemes only pay to those who are legally married or are civil partners. Check your own scheme. There may also be restrictions if the partnership is of short duration or if there is a large age difference. Children may also benefit from a dependents pension if they are below a certain age. Check your booklet.

5 year guarantee
Most pensions are guaranteed to be paid for 5 years after a person retires. This means that if a pensioner dies within the 5 years, the balance of money which would have been due is paid to the surviving dependent as a tax free sum. The dependant’s pension normally starts on death. There can be variations, check your own scheme arrangements.

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