WikiActuary - Pensions

Pensions in the United Kingdom fall into seven major divisions; Basic State Pension, State Second Pension (S2P), Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions. Personal accounts, automatic enrolment and the minimum employer contribution will be new policies joining these from 2012.

The state provides basic pension provision intended to prevent poverty in old age. Until 2010 men over the age of 65 and women over the age of 60 were entitled to claim state pension; from April 2010 the age for women is gradually being raised to match that for men.[1] Longer-term, the retirement age for both men and women will rise to 68 by no later than 2046[2] and possibly much earlier.

The basic state pension, then known as the "Old Age Pension" was introduced in the United Kingdom (including Ireland) in January 1909. A pension of 5 shillings per week (25p, equivalent, using the Consumer Price Index, to £19 in present day terms),[3] or 7s.6d per week (equivalent to £29 today) for a married couple, was payable to a person with an income below £21 per annum (equivalent to £1600 today), following the passage of the Old Age Pensions Act 1908. The qualifying age was 70, and the pensions were subject to a means test.

State pensions

State pension comprises three main elements – the basic pension, additional pensions, and pension guarantee. These are described in the following sections.

Additional Pension

Three different state schemes have existed to provide extra pension provision above the Basic State Pension. These are collectively known as Additional Pension. This has been available only to employees paying National Insurance and certain exempted groups (not including the self employed). The three schemes are/were:

SERPS ran from 6 April 1978 to 5 April 2002. As the name implies, the level of pension payable was related to the recipients earnings via their National Insurance contributions. Qualification was based on band earnings above a Lower Earnings Limit (LEL) in each year. The LEL (£84 per week /£4368 pa in 2006/07) is usually set at the same level as the BSP (£84.25) and increased when BSP did. Band earnings lie between the LEL and an Upper Earnings Limit (UEL) at which National Insurance contributions ceased to be payable by the employee (this is £645 per week/£2,795 per month in 2006/07, although the UEL now refers to a threshold where reduced NI payments are made, as opposed to payment ceasing). The UEL is also adjusted annually.

• Graduated Pension or Graduated Retirement Benefit
Graduated pension ran from 6 April 1961 until 5 April 1975. Qualification was based on payment of a number of fixed National Insurance payments ('stamps'). Graduated pension typically pays a small amount (a pound or so per week) to those affected.

• State Earnings-Related Pension Scheme (SERPS)
• State Second Pension (S2P)
S2P was introduced on 6 April 2002. As with SERPS, the level of pension payable is related to the recipients earnings via their National Insurance contributions. Qualification is based on earnings at, or above, the LEL, but no band earning calculation is made until earnings reach a higher base (£12,500 pa in 2006/07) called the Lower Earnings Threshold (LET). Earnings below the LET (but above the LEL) are credited up to the LET.

Unlike the Basic State Pension, participation in the Additional Pension schemes is voluntary. Those who do not wish to participate can contract out. This option was introduced with SERPS in 1978 and is only available to those who have made alternative pension arrangements through Personal or Occupational schemes. Further changes to be introduced in 2012 will see S2P change from an "earnings related" to a "flat rate" pension, and individuals will lose the right to contract out.

Occupational pensions

Occupational pension schemes are arrangements established by employers to provide pension and related benefits for their employees.

Defined benefit/final salary schemes
Traditionally, a large number of UK employers offered their employees access to a defined benefit or final salary occupational pension scheme. In such an arrangement, the employee was promised a fixed level of pension based on their final salary to which he or she would become entitled on retirement. The amounts payable are restricted by taxation rules, but are typically either a pension of one-sixtieth of their final salary for each year of membership or a pension of one-eightieth of their salary plus a tax free lump sum of three-eightieths.

Defined contribution/money purchase schemes
Over recent years, many employers have closed their defined benefit schemes to new members, and established defined contribution or money purchase arrangements. In this arrangement, the occupational pension pays into a fund, and the fund is used to buy a pension (typically an annuity) when the individual retires. The pension is therefore determined by the value of the fund and the health of the annuity when the individual retires, as opposed to their salary.

Funding
UK occupational pension schemes are typically jointly funded by the employer and the employees. These are called "contributory pension schemes" since the employee contributes - typically something in the region of 6% of salary, tax free. "Non contributory pension schemes" are where the employer funds the scheme with no contribution from the individual. Contributions are typically put into a separate trust, whose assets will be used to provide benefits in due course.

Tax registration
Most schemes are also registered for tax purposes, which gives the scheme various tax advantages – assets grow free from income tax, capital gains tax and corporation tax, employees can normally make contributions out of their gross (untaxed) income, and employer contributions are generally tax deductible. Only funded schemes can be registered.

Prior to April 2006 schemes were 'approved' by HMRC rather than registered. Approval placed certain limits on the benefits which could be provided, which led to a growth of 'unapproved' (i.e. without the generous tax treatment) retirement arrangements - these unapproved schemes were commonly distinguished by reference to their funding status (funded unapproved retirement benefit schemes FURBS and unfunded unapproved retirement benefit schemes UURBS).