There are two different types of workplace pension schemes offered by employers:
Final Salary Pensions (or Defined Benefits Schemes)
These are often called the Rolls Royce of pension schemes because they provide a guaranteed income for the rest of your life based on a combination of your salary and the length of time that you we're in the pension scheme.
The advantages is that your income in retirement is to all intents and purposes guaranteed by the company as they carry all of the investment risk to provide you with the pension. Once you start to receive your pension it will increase each year. In the event of your death a spouse or partners pension would be payable equal to 50% of the pension you were receiving, which will go up in payment and continue until the death of your spouse or partner. In the majority of cases there is also a dependents pension for children who are still in full time education which normally finishes at age 18 but in certain circumstances can continue until your children are aged 23.
The disadvantages is that the payment is fixed and structured in such a way that you are unable to alter it. The benefits will be paid in Sterling which mean if you are no longer a UK resident you will carry the currency risk depending on where you now live. The cost of these schemes is very high which is why the majority of companies have closed their schemes to new members. The company are required to make payments to ensure that there is sufficient funds in the scheme to meet its liabilities. Unfortunately, an increasing number of schemes are not fully funded and a growing number have large deficits.
Defined contributions schemes
There are a number of different variations on this type of scheme but they are all based on contributions that you and your employer make to the scheme. The pension you receive will depend on three variables:
