Pensions Flashcards
Basic State Pension
To receive a basic State pension a person must have paid, or be credited with, sufficient National Insurance contributions (NICs). If they have not paid, or been credited with, enough payments to receive the full amount of basic State pension they can receive a proportion of it. The full amount of basic State pension for a single person is £113.10 (2014/15).
Graduated State Pension
SERPS
S2P
The Government made changes to SERPS from April 2002 and the revised scheme was called the State Second Pension (S2P). S2P focuses more on lower paid workers. They built up much better earnings-related pensions than they could under SERPS. At its introduction S2P provided those earning below the Lower Earnings Threshold (LET) with twice the amount they would have received under SERPS. In 2002/03 when S2P started, the LET was £9,500 a year. This has increased to £15,100 in 2014/15.
Defined Benefits - Average or Final Salary schemes
This type of scheme sets out to provide members with a pension that is related to their earnings.
Early schemes provided the member with a pension of a fraction of their actual salary in each year of scheme membership. The eventual pension was the total of these fractions. These were known as average salary schemes.
Inflation tended to reduce the value of the pension earned in the early years of scheme membership. This led to schemes revaluing the pension earned each year from the year it was earned up to retirement. These were known as revalued average salary schemes.
Typical accrual rates for a pension are 1/60th or 1/80th of earnings for each year of service.
Example: A member retiring on a salary of £30,000 after 40 years’ scheme membership would be entitled to a pension of 40/60 × £30,000 = £20,000 per annum.
Defined Contributions or Money Purchase
As employers have tried to control costs, they have tended to switch to schemes where they decide how much their contributions will be. Employees are usually asked to make a contribution too. The rates of contributions tend to be expressed as percentages of earnings, but sometimes may be expressed as a fixed monetary amount such as £50 per month. These types of scheme are known as defined contribution or money purchase schemes.
Each time employees are paid the employer will deduct the appropriate amount of employee contribution from pay, and add in the appropriate amount of their own contribution. The contributions will be invested until the employee retires. At retirement the fund that has been built up from the invested contributions is then used to provide retirement benefits.
