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Pensions guide

Pension basics

Advice from the Pension Service
Changes to pension rules

What's the difference between the basic state pension and a personal pension?

The state pension is the basic pension provided to all past retirement age. It is not sufficient and many people contribute to private pensions - both personal and company. Personal pensions are pensions for those people who cannot join a company scheme. And company pensions are provided by your employer.

What are SERPs?

If you're employed, part of your National Insurance contributions goes toward your State Earnings Related Pension Scheme (SERPS), which is paid out on top of your basic state pension when you retire. Many people choose to "opt out" and have this money paid into a personal pension.

Should I join my company pension scheme?

The answer to this is almost always YES according to independent financial advisers. The reason for this is that most employers contribute towards your pension scheme as well as you. As a result the pot of money in a company pension will be larger than that in a personal pension.

What are money-purchase and final salary pension schemes?

Money-purchase or defined contribution schemes involve the employee and employer paying a set percentage of salary into the scheme. That money is invested and the fund grows until you reach retirement and buy an annuity.

Final salary or defined benefit schemes give employees a fraction of their final salary on retirement for each year they have worked for the company.

What are AVCs?

Additional voluntary contributions or AVCs allow you to supplement your pension contributions to build up an even larger retirement fund. AVCs attract tax relief on the premiunms, but the final benefits are taxed as income. Most indpendent financial advisers say AVCs are better for basic rate taxayers and Personal Equity Plans or Peps are better for higher-rate taxpayers as a way of supplementing pension income.

What happens to my pension if I get divorced?

Since July 1996 women have been able to ear-mark their husband's pension - so when he retires they receive a proportion of it. The government is working on new laws to split it at the time of divorce.

What happens if I retire early?

Usually you can expect to lose a lot of money. Anyone with a final salary pension scheme will lose nearly 50 per cent of its value. The same is true of money-purchase schemes and personal pensions.

How can I check my pension's performance?

This is only important if you have a money-purchase or personal pension scheme. Employers will make up a final-salary pension regardless of the fund's performance.

Money purchase schemes provide annual statements showing the growth of the fund. You should check this against the growth of the FTSE 100 index. It should grow at the same rate or better.

To check the performance of a personal pension - try using an online calculator such as the Interactive Investor one. To check this, click on the Tools icon in the left-hand navigation pane of this page.

What if the pension i'm sold isn't suitable for me?

First of all get in touch with the company or adviser who sold you the pension. If you are not satisfied with that company's response, contact the Personal Investment Authority's helpline on: 0207 417 7001 or contact the Financial Services Authority public enquiries office on: 0845 606 1234.


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