In this article, we look at what you should look for in a good pension scheme.
An occupational scheme usually offers the best deal and all public sector and most large private sector organisations provide one. Employers who don’t will have to do so by 2018 and should now have plans in place. Self-employed people will need to get a personal pension.
Employer contributions should be part of an occupational scheme. By 2018 they will have to put at least 3% of the employee’s salary into the scheme. Many put in much more. Good practice is for the employer contribution to be double that of the employee. The average employer in private sector schemes is between 7% and 14% depending on the scheme. In the public sector it is around 20%.
The type of scheme. Occupational schemes can be either “defined benefit” or “defined contribution” (also known as money purchase). Some are a mix of the two (so called hybrid schemes). Most public sector schemes are defined benefit. They provide a pension based on the employee’s salary and years of contribution. Defined contribution schemes invest the contributions to build up a sum of money which is then used to provide an income.
Additional benefits will depend on the scheme. Things to look for include death in service benefits, a full ill health retirement pension, index linking of pension, opportunity to retire early on reduced benefits, benefits for partners, and a tax free lump sum option. Defined contribution schemes may not provide all of these but good employers provide them through related insurance cover.
Employee contributions should be clearly stated. In defined occupational schemes they should be a percentage of salary and be around half that of the employer with the total contribution ideally being at least 15% of salary. Private pension plans should allow for flexible contributions.
Management charges should be as low as possible. The average of new occupational schemes in 2012 was just over 0.5% of the annual contribution. Schemes should not have hidden charges.
Transfer of funds to another scheme can be a useful feature but is not always the best option. Where it is available, any charges in your own scheme should be clearly stated and be as low as possible.