Company pensions

There are two main types of Company Pension schemes:

Final salary (also called 'defined benefit')

With these, you are promised a pension, worked out according to a formula based on your pay and the length of time you have been in the scheme. Your pension is worked out as a fraction - for example, 1/60th - of your pay at or near retirement multiplied by the number of years you work for the company. So if you work there for 30 years you get 30/60ths or half your pay as a pension.

Money purchase (also called 'defined contribution')

These work like savings plans. The amount of pension you get depends on the amount paid in, how well your investment grows, the amount taken off in charges and other factors.

Remember that unless you have a final salary scheme, the amount of company pension you get at the end depends on how well your pension fund performs, charges etc. Some of the investments that the pension fund invests in, like stocks and shares, may increase or decrease in value, which in turn may affect the value of your pension fund.

When you join most Company Pension schemes you 'contract out' (or opt out) of the State Second Pension. This means that any second pension income you get on top of your basic State Pension will come from your Company Pension scheme, not the state.

What does it provide?

Your employer contributes to the scheme on your behalf and generally you get a package of benefits, which often includes:

A pension payable from the normal retirement age for the scheme (often age 65)
Annual increases to the pension once you start receiving it
Option of a tax-free lump sum payable at retirement
The possibility of retiring earlier, but on a reduced pension
A pension if you have to retire early because of ill health
Pensions for your widow or widower and other dependants if you die

Pros and cons of Company Pensions

Pros

Often provides generous benefits

If it's a final salary scheme it's often lower risk than taking out a Personal Pension or Stakeholder Pension, as there is a set formula that works out what pension you get, rather than your final pension being dependent on the performance of the pension fund

If it's a contracted out scheme, both you and your employer will pay lower National Insurance contributions

You get tax relief on any contributions you make to the scheme. Contributions are made out of your gross pay - before tax is deducted - saving a basic rate tax payer £22 for every £100 contributed and a higher rate taxpayer £40 for every £100 you pay in