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What should I ask a prospective employer about pensions?
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: What pension scheme or schemes can I join and how much do you contribute?
All employers must automatically enrol eligible workers into a workplace pension to which they contribute and enrol other workers if they request it. By 2018, this will be extended to even the very smallest employers. For more on the legal obligations of employers, see Workplace pensions on the GOV.UK website.
The next question to ask is: Can I join 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.
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.
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 how you used the pot to provide an income.
Often pension scheme members use their defined contribution pension pot to buy an 'annuity', which is a financial product that provides a pension for you for life. However, since 2015, the rules on what you can do with pension savings have been relaxed and there are other options, as the government web site Pension Wise explains. You could seek advice from an Independent Financial Adviser (IFA) or at least talk to Pension Wise.
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?