Pensions are intended to provide income when people retire.  Not everybody has the chance to earn a pension, and there are different kinds of pensions.  The government is trying to make sure that more people get pensions by bringing in a pension called a Stakeholder Pension.

This factsheet looks at the different kinds of pension which are available, and then explains more about the new Stakeholder Pension.  It is intended to give you some basic information.  Any decisions you make about pensions should always be made very carefully, and you may find it helpful to seek advice from a trade union, advice agency or other reliable body.  Remember that people selling ordinary pension plans will often be getting commission on every sale that they make, so it is in their interests to persuade you to take out a certain pension, even if it is not the best deal for you.  A lot of people were persuaded some years ago to take out personal pensions when they should have stayed in the pensions they already had at work.

Kinds of Pensions

There are all sorts of different pensions, and many people will have more than one.  There are basically three kinds of pensions:

• Pensions provided by and through the state.

• Pensions provided by and through your employer.

• Personal pensions bought by individuals from pension companies.

State Pensions

              The basic pension is the State Retirement Pension.  If you earn above the National Insurance Lower Earnings Limit you will be building up the right to a state pension.  Unemployed people and people who are out of work because of caring responsibilities are usually given “credits” towards a pension.  The amount of the pension will depend on the number of “qualifying years” you have built up.  Men get a full pension if they have 44 qualifying years, and women if they have 39 qualifying years.  At the moment men get the state pension at age 65 and women at age 60.  But this will change over time and by 2020 the state pension age will be 65 for both men and women.  If you take a job which pays less than the Lower Earnings Limit you will be losing out on your right to a state pension.

              People who pay National Insurance contributions are also able to be part of the State Earnings Related Pension Scheme (SERPS).  This is an extra pension paid by the state to employed people and is worked out according to the amount you have been earning over the years.  (Self-employed people are not included in SERPS.)  In general, the more you earn over your working life the more SERPS you get, although there is an upper limit.  Some people have “opted out” of SERPS into “contracted out” pensions, and they pay a little less in National Insurance contributions; others stay in SERPS and also buy personal pensions to give them more money when they retire.  The last government changed the rules on SERPS so that many people will get a lower SERPS pension than was originally expected when the scheme was set up.  The general rule is that if you are young it may be worth “contracting out” of SERPS, but if you are older then you should stay in.  However, the present government has said it plans to reform SERPS to provide a more generous State Second Pension.  Always take advice before making a decision.

If you want to know more about state pensions then there are leaflets available from the Department for Work and Pensions, who can also tell you what your state pension rights are.  If you want to know what state pension you might get when you retire, ask the DWP for Form BR19 and they will send you a “pension forecast” based on the contributions you have made.

Occupational Pensions

Some employers have their own pension schemes, which are called “occupational pension schemes”.  If your employer has an occupational pension scheme this is usually the best scheme for you to be in, because your employer will in most cases also be paying into the scheme for you.  So you get a better pension than one which is just based on what you have been able to put in.  You can get an occupational pension in addition to your state pension and your SERPS pension, although a lot of occupational pension schemes are “contracted out” of SERPS, in which case you would just get your state pension and your occupational pension.

There are different kinds of occupational pension schemes.

              Salary-related schemes.  The pension you get is based on the number of years you have belonged to the scheme and on how much you earn (often your salary when you retire or leave the scheme).  This is usually the best kind of occupational scheme because you will get an amount of money which is based on your earnings.

             Money purchase schemes.  You and your employer put money into the scheme and this is invested and each year the pension fund adds money to your “pot” based on how well the investments have done.  When you retire there will be an amount of money available for you, and this is then used to buy something called an “annuity” (ie a pension).  You will not know how much you will get from an annuity until it has been bought.  If your annuity is bought on a “good” day it will be better than one bought on a “bad” day; things like interest rates at the time will affect this.

              Mixed benefit schemes.  Some employers run schemes which are a mixture of salary-related and money purchase schemes.  The pension you get will depend upon which part of the scheme you belong to.  Your employer should tell you, but if you are in doubt ask.

Personal Pensions

A personal pension is a way for you as an individual to save for your retirement.  There are all sorts of personal pensions on offer from different pension companies, and sorting out what is best for you can be complicated.  For some people a personal pension is the best way to make sure that they have a second pension in addition to the state pension.

If you belong to an occupational pension scheme you cannot usually also have a personal pension, so you have to choose.  It is usually much better to be in an occupational scheme than to have a personal pension, as it usually offers much better benefits.

If your employer does not offer an occupational pension you have a number of options:

• you can stay in SERPS and build up a second state pension;

• you can stay in SERPS and also take out a personal pension;

• you can “contract out” of SERPS and take out a personal pension (the Inland Revenue will pay some of your National Insurance contributions into your pension scheme each year).

If you are self-employed you cannot be part of SERPS and you will not have an occupational pension, so the only way you can have a second pension is by taking out a personal pension.

Personal pensions operate in the same way as money purchase schemes run by employers.  The amount of pension you get will depend upon how much money you have put into the scheme and how much it has earned through investments while it has been there.  When you come to draw your pension you will get an annuity, which will vary according to the amount of money you have and interest rates at the time, etc.

Buying a personal pension can be risky.  Some firms charge very high rates for running your pension fund, and so not all the money you pay in goes towards your pension.  It can be very difficult to leave the fund without losing money.  Some firms make you pay a penalty if you stop paying into the fund, and you will have to pay a charge if you want to move your pension to another fund.  Almost a third of the people who buy personal pensions stop paying into them within three years.  This does not mean that you should not be buying a personal pension, but it means you need to be very careful before you sign up for one.

It is because personal pensions can be risky and costly that the government is now requiring employers to offer STAKEHOLDER PENSIONS to many employees. The rest of this factsheet explains what Stakeholder Pensions are, what employers are expected to do, and who is able to join a Stakeholder Pension.

Stakeholder Pensions

The idea behind Stakeholder Pensions is that this is a way of letting people join a personal pension scheme who would not normally join.  These new pension schemes became available from 6^th April 2001.  The government has passed laws which mean that employers must give certain employees the chance to join a Stakeholder Pension Scheme by 8^th October 2001.  These schemes are special schemes which the law says must offer very low charges and allow people to change schemes without having to pay a penalty.

Your employer will not have to offer a Stakeholder Pension if:

1.               S/he employs fewer than five people. OR
2.               There is already an occupational pension scheme that all workers can join within a year of starting work. OR
3.               S/he offers you the chance to belong to a personal pension scheme:

• which is available to all employees who would otherwise be eligible to join a stakeholder pension scheme;

• to which the employer makes a contribution of at least 3% of your pay (but this does not have to include commission, overtime and bonus payments);

• where the employer deducts your contributions straight from your pay and sends it to the pension fund;  and

• which has no penalties if you stop paying in or move to another scheme; OR

S/he offers an occupational scheme for some staff and a personal pension scheme for the rest, and these meet the conditions.

Your employer does not have to give you access to a Stakeholder Pension if:

• you have worked for the employer for less than three months in a row; OR
• you are a member of an occupational pension scheme, or you could have joined but decided not to; OR
• you cannot join the occupational scheme because the rules don’t allow people under 18 or within five years of retirement to belong; OR

1. your earnings have not reached the National Insurance Lower Earnings Limit for at least three months in a row; OR
2. you cannot join a Stakeholder Pension because of the rules laid down by the Inland Revenue (eg because you do not normally live in the UK).

An employer who has to offer employees access to a Stakeholder Pension must:

• choose a registered scheme or schemes from an official list;
• discuss the scheme(s) with employees who are eligible;
• formally choose the scheme which is to be offered and give workers the name and address of the scheme;
• arrange to deduct contributions from their pay for all workers who have chosen to join the scheme, explain how this is to be done, and send the contributions to the pension scheme;
• keep a record of the payments made to the pension scheme.

Should you join a Stakeholder Pension Scheme?

The government says that anyone who earns less than £10,000 a year (about £192 a week) may find it better to stay in the state pension scheme instead of starting a Stakeholder Pension.  Remember that unless you can afford to put a reasonable amount of money into a Stakeholder Pension for a considerable number of years the amount you get in extra pension will be quite small.  But it could well be enough to mean that you cannot get the extra benefits the government gives to pensioners on low incomes, such as the Minimum Income Guarantee or help with your housing through Housing Benefit and Council Tax Benefit.

You also need to be clear that your employer does not have to pay anything into your Stakeholder Pension.  If you choose to join a Stakeholder Pension this does not mean that you are getting a pension from your employer.  All it means is that your employer has been told to help you join a low-cost pension scheme.  All the payments into the scheme will come out of your own pay.  Your employer could choose to also put in some payments, but there is no law which says s/he must do this.  All schemes must accept payments of £20 or more, but some schemes will refuse to accept smaller amounts.  You can pay every week or every month.  Your employer must give you information about how to change or stop your contributions.

Just because your employer offers you the chance to join a Stakeholder Pension does not mean you have to join this pension scheme.  You can choose a different Stakeholder Pension, but in this case you will have to make your own payments direct, and your employer will not arrange it through the payroll.  If you are already in a pension scheme and join a new employer, you can transfer to the scheme chosen by your employer.

Your employer is not allowed to advise you what to do, and your employer cannot make you join a scheme.  You must make your own decision about what is best for you.

Both you and your employer may find it difficult to know what would be the best Stakeholder Pension scheme for you to join.  There will be a lot on offer and you should encourage your employer to get information about a number of schemes.  You may find it helpful to look at schemes which have been agreed between trade unions and pension companies, because the trade unions will have been making sure that they get the best terms for the workers involved.  The TUC has a scheme which offers a number of benefits in addition to the pension itself.

When making a decision on something as important as a pension don’t rush into anything.  If you are not sure about what to do then you should seek advice from your trade union or from an advice agency.  There are also many leaflets available to help people.

• The Department for Work and Pensions has a number of free leaflets about pensions, including state pensions, occupational pensions, personal pensions, pensions for the self-employed and for women, and contracted out pensions.  You can get copies of these leaflets by calling the Pensions Info-Line on 08457 31 32 33 (it is open 24 hours a day and calls are charged at local rate).
• The Financial Services Authority also produces a range of free booklets on pensions, and you can get copies by phoning the FSA on 0800 917 3311 (this is a freephone).