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Pension schemes


Most people seek to make some provision for a continuing income after they retire from full-time employment. Many are able to effect this through pension schemes provided by employers, whether that employment be in the public or the private sector. Almost all public-sector employers make membership of a contributory pension scheme obligatory for every full-time employee. The Civil Service is an excellent example. Such a compulsory scheme exists here and members continue to belong to it even when they have moved,’ whether to a different department or another location with the Service. The same applies in the education system, where teachers, irrespective of movement between schools, belong to a state pension scheme which will provide them with a regular pension on retirement. Some schemes, particularly the Civil Service’s, offer the considerable additional benefit of index linking the pensions earned so that they automatically increase with the cost of living. In all these schemes, initial pensions are linked to the salaries or wages previously earned – usually the salary or wage received during the years immediately preceding retirement.

Employers in the private sector often provide contributory pension schemes where, as in the public sector, contributions made by the employee are matched by equal or greater contributions made by the employer. An additional advantage of all such schemes is that both sets of contributions are tax-deductible. Pensions eventually paid are normally taxable, but in most instances an option exists to take a lump sum payment on retirement in place of a regular pension, or sometimes a smaller lump sum plus a modified pension. Such lump sums are tax-free. These schemes are known as occupational pension schemes.

The one disadvantage of these contributory pension schemes is that should the employee leave the public sector to work in the private sector or, being in the private J sector, move to another employer, then the pension rights will cease. If he or she has been many years in that employment an entitlement to an appropriate pro rata pension on retirement may be frozen according to contributions paid. In many instances. However, all that happens is that the contributions paid to date by the employee are returned and any future pension rights must then be re-earned.

Because of such occurrences and for the benefit of the vast number of self-employed persons to whom no pension scheme applies, many finance or insurance companies have instituted personal pension schemes which take the form of contracts whereby future pension rights can be accumulated by the payment out of earnings of regular amounts, which can be varied from year to year according to the means of the payer. The contributor can often choose between alternative funds, each of which invests contributions in a different type of security, e.g. property funds, equity funds, gilt-edged funds, etc. What is more, he can also, in certain instances, opt to split his contributions between selected funds. As with the employment-related schemes, contributions are tax-deductible (within fixed limits) and there is an option to take a tax-free lump sum on retirement in place of all or part of the pension.

All these pension plans, whether employment-related or privately funded, provide pensions which are in addition to the basic State pension, which is paid out under the National Insurance scheme.

Reference: The Penguin Business Dictionary, 3rd edt.