These offer a guaranteed pension amount, which is based on the salary of the employee and the amount of service that he has given to the employer. These are typically based on 1/80 or 1/60 of the salary and are based on the number of year of service.
Employers can set up occupational schemes for their employees. In the public sector, a public sector occupational scheme will typically remunerate 1/80 of final salary for each year of service with a maximum multiple of 40 years of service and this will be in addition to 1.5 x final remuneration salary. With private sector schemes, which are either defined benefit schemes or money purchase schemes (known as defined contribution schemes), the level of income will be dependent on either the defined benefit or the contribution.
Annual pension contributions have a new limit to attracting full tax relief. The limit is the greater of £3600 or 100% of annual salary subject to the annual allowance, which is £245,000 in the 2009/ 2010 tax year. So therefore, any contribution that is made above, the allowance is subject to tax and charges.
Personal pensions were introduced in 1988. They were designed to provide people that were not part of a company scheme with the opportunity to save and to have their own pension that was portable. They were designed on a money purchase basis. Since 2001, individuals legislation means individuals can have both a company scheme and personal schemes. Essentially, the government is trying to encourage saving as much as possible and so have allowed multiple forms of pension.
The State Second Pension (S2P) was introduced by the Child Support Pensions and Security Act of 2000. It was put in to replace the State Earning Pension Scheme (SERPS). SERPS was set up in 1975 and began in 1978. They are independent of the Basic State Pension Scheme and based on a proportion of earnings during the individual’s lifetime, so the State Second Pension Scheme replaced SERPS. The S2P will initially start as related to earnings but with three rates that will build for each tax year depending on the individual’s earnings.