ABSTRACT
Where an opportunity arises to join an employer’s occupational pension, it is generally wise to do so. The main advantages of occupational pensions must be kept in mind. In the case of this form of pension, the employer normally contributes a fixed percentage of the employee’s salary to the scheme (which will, of course, rise as the employee’s remuneration increases), and, in addition, the employee will contribute a fixed percentage of his income to the scheme. The employee’s contributions are deductible for income tax purposes even at the higher rate of tax and so are tax advantageous. The employee obtains income tax relief to a limit of 15% of his remuneration (s 592(7) –(8E)). There is also an earnings ceiling of £84,000 for 1997-98 (s 592(4)). The employer whose ordinary annual contributions are also tax deductible, will also bear the management expenses involved in relation to a company scheme, and thus the expensive management costs of setting up a personal pension are avoided. In addition, a pension, unlike other employee benefits such as cars, is not taxed as a benefit in kind. Under an occupational pension scheme, an employee may sometimes retire earlier than the contracted date of retirement (usually 65) on grounds of, eg ill-health or by agreement with his employer. In these circumstances, referred to as ‘enhancement’, the employee is credited with the benefits of all or a proportion of the contributions that he would have paid had he actually retired at 65. For example, if an individual retires at 55, he may well be credited with an extra 10 years’ contributions. However, although the pension will be index-linked (at least in respect of post-April 1997 service benefits) he will, of course, lose the benefit of any increased contributions resulting from salary increases between the date of actual retirement and normal age for retirement, eg 65. It may be argued that final salary occupational pensions carry less risk than personal pensions, since they are guaranteed by the employer. The size of the fund in the case of personal pensions generally depends on Stock Market fluctuations. In
principle, although, in the past, some schemes provided for an accrual rate of 1/60th, ie the employee on retirement receives a pension based on his number of years of service with the company, divided by 80. The maximum pension normally payable is limited to 40/80 years’ service so the maximum annual pension is calculated by multiplying his highest earnings in the last three years immediately prior to retirement by 40 and dividing by 80. In addition to an annual pension of that amount, he will normally receive a tax free lump sum of three times his annual pension. It is wise to calculate roughly whether an employee will be in reckonable service for a full 40 years (few, in fact, are), and to have some idea of what his likely earnings will be. There are, of course, imponderables, to an extent, but an approximate calculation may be made. Sometimes, occupational pensions are on the 1/60th principle, which is obviously more beneficial in that less years of service are required to acquire a right to a half salary pension. An employee, must, therefore, consider from an early stage how many years he is likely to work, have some idea of what his likely remuneration may be, and bear in mind the annual pension (not the lump sum, which is tax free) will be subject to tax under Schedule E on retirement in the normal way. In addition, the individual must calculate whether he will receive the full basic rate state pension (he will normally be contracted out of SERPS) and, if necessary, write to the Department of Social Security to obtain details of his national insurance record. (A full state pension depends on the number of years he has been paying full national insurance credits.) An employee would be well-advised to calculate, approximately, every 10 years or so, what his pension benefits are likely to be, so as to ensure he will have sufficient to enjoy life in retirement without financial anxieties. He must, of course, in his rough calculations, take into consideration his other assets and liabilities, eg his home, any life assurance he has, and potential inheritances. He would be wise, in addition, not to forget the escalating cost of nursing home care. If he is in any doubt as to adequacy or otherwise of his income/capital on retirement he should seek specialist advice from a suitably qualified solicitor or independent financial adviser. He may well consider ‘topping up’ his pension via AVCs or FSAVCs. The former are, as explained in Chapter 2, additional voluntary contributions by a member of a pension scheme to that scheme to increase his future pension entitlement. FSAVCs are, of course, free standing additional contributions paid by a member to, eg an assurance company outside the company pension scheme to ‘top-up’ or provide additional benefits. Clearly, an employee who does not join his company’s occupational pension scheme at an early age will be in receipt of much smaller pension benefits than long-term employees.
