Joining an occupational pension scheme

These are schemes arranged by an employer for employees. There are two basic types: final salary and money purchase.

Final salary

The pension is based on the final pensionable salary (FPS), i.e. that received immediately before retirement, or a formula such as the average of the last three years. It is the best form of pension for an employee, because the benefits are fixed. Usually the employee contribution is a fixed percentage of salary and the employer pays the rest.

The amount of pension is calculated by multiplying the FPS by a fraction in respect of each year of service, such as 1/60 which achieves a 50% pension after 30 years' service (called a 60ths scheme).

Money purchase

Here the contributions are fixed and the benefit varies, which is much less attractive to the employee but much more advantageous to the employer (many have switched new employees to money purchase). Most of the accumulated funds must eventually be used to buy an annuity.

The disadvantage to the employee is twofold: not knowing in advance either how much the invested contributions will earn or what pension the final amount will purchase.

Questions to ask before joining. It is nearly always advantageous to join a company scheme, but first find out:

• Is it final salary or money purchase? ~ Is it contracted out?
• What are the contribution rates, for employer and employee?
• Can a tax-free lump sum be taken on retirement?
• Is there a contingent spouse's pension?
• What happens in the event of death, in service or in retirement?
• What happens if employment is ended by either party?
• What would be the effect of being laid off without pay, or short-time working?

If it is a final-salary scheme:

• How is the pension calculated?
• Is there any post-retirement adjustment for inflation and is it guaranteed or discretionary?
• What are the rules for early and late retirement and is there any difference if early retirement is due to ill-health?

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