A pension is a very important part of the pay package offered by an employer. A good pension can add as much as a quarter to the value of your salary. Particularly if you intend to work for an employer for more than a short time and have any choice about the job you do, you should ask some hard questions about the pension scheme on offer.
The first question to ask is:
Do you provide a pension to which the employer contributes?
Every employer with more than five staff now has to offer a gateway to a stakeholder pension (though many don't). But employers do not have to make any contribution to the pensions of their staff.
So the first thing to do is to establish whether they make a contribution. Simply providing a stakeholder pension with no employer contribution does no more than provide an opportunity to staff to save their own money. While an employer- provided stakeholder may be a convenient way to save, and may have lower charges than one you can set up on your own, you will have to put a great deal of your own money aside to get a reasonable pension.
The next question to ask is:
If so, is this a salary related pension or a money purchase scheme?
There are basically two types of pension provided by, or through, employers. It is important to understand the difference. You can read more about this here.
Salary related pensions (also known as defined benefit or DB schemes) pay a pension based on how long you work for the employer that runs the scheme and the salary you are paid. Unless you are working in the public sector, it is very unlikely that you will be offered a salary related pension.
There is more information aboutwhat makes a good salary related pension schemehere.
Money purchase pensions (also known as defined contribution or DC schemes) are a kind of savings scheme. You build up your own savings (often called your pension pot) made up of your contributions, tax rebates and usually an employer's contribution. The pension you receive will depend on how much you and your employer contribute (the defined contribution), how well the pension fund's investments perform and annuity rates when you retire. An annuity is a financial product that you buy with your savings and provides a pension for you for life.
Employers can set up their own money-purchase occupational scheme or provide a gateway to another scheme. While there are differences between the two, the most important factor is how much the employer will contribute.
Money purchase schemes are much simpler, and therefore easier to understand. There are only two key questions to ask:
What contribution does the employer make?
Is this dependent on an employee contribution?
There is more information about what makes a good money purchase schemehere.
