Types of UK Pension Schemes

Additional Voluntary Contributions (AVC)

Provides the opportunity for employees who are members of an occupational employers scheme to invest extra contributions for their retirement. The retirement age will be the same as the normal employers scheme and the additional benefits purchased will normally be in the form of extra years for defined benefit schemes and additional funds for those with defined contribution schemes.

Basic State Pension

Based on numbers of years credits of National Insurance contributions and paid as a fixed amount at State pension age of 65.

Defined Benefit Schemes

Employers company pension scheme based on benefits of final salary or career average earnings. Benefits normally involve a lump sum and an income for life based on the number of years within the scheme with most schemes being based on 1/60 of final salary for each year of work subject to a maximum of 2/3 final salary at retirement. Very few employers now offer such schemes due to the financial guarantees that employers have to undertake and sadly many schemes are now in deficit.

Defined Contribution Schemes

Employer company pension scheme based on a specific contribution levels which provides a pension fund at retirement based on investment performance and therefore the level of pension is not guaranteed and is dependent on investment performance and the risk of bad performance rests with the employee and not the employer. Most UK employers have therefore limited their future pension liabilities by closing defined benefit schemes and offering defined contribution schemes as they do not have carry liability.

Free Standing AVC’s

Introduced in 1987 and similar to AVC’s FSAVC’s are personal and run by pension providers offering additional retirement benefits but on a money purchase basis and are not part of an employer’s scheme and therefore can have a retirement date selected by the member and different to the normal scheme retirement age. Tax relief on contributions is allowed up to prescribed limits.

Personal Pension Plans

Introduced in 1988 with the aim of giving those individuals not in a company pension scheme their own portable pension that they can take from employer to employer and make personal contributions (up to prescribed limits). Run on a money purchase basis a personal pension offers greater investment flexibility.

State Earnings Related Pension Scheme (SERPS)

A UK government scheme that enabled employees to top up the basic state pension received on retirement with additional pension payments based on their earnings. SERPS was replaced in 2002 with the state second pension (S2P).

Second State Pension

Replaced SERPS and is designed to give more to the lower paid and middle earners, carers and the long-term disabled with broken work records. The second state pension operates a flat rate level meaning higher earners are less well off. Due to be abolished in 2016 the basic state pension and second state pension will be combined into one flat rate pension and full entitlement will apply if an individual makes 35 years of national insurance contributions. Those individuals already receiving benefits will keep the existing entitlements.

Self Invested Personal Pension (SIPP)

A SIPP allows investment freedom so an individual can invest their own contributions according to their attitude to risk whilst allowing an individual control over their pension planning and investment selection. Normally considered suitable for experienced investors SIPPS have recently grown in popularity as they are very portable allowing individuals to continue investing whilst moving employment and offer more investment options than a traditional pension. Tax relief on contributions is available (up to prescribed limits) and SIPPS are offered on a money purchase basis.