The obvious way of judging a pension is to look at how big your pension is likely to be, and compare it to the contribution you have to make.
But it's a bit more complicated than that. Different pension schemes can offer different benefits in addition to the member's regular pension payment, and can be more or less flexible in the choices they give members.
Of course features that are good for some people may not be useful for others. It's worth remembering when checking out your scheme that a generous no-frills pension might be better value for many scheme members than a less generous pension with lots of bells and whistles.
On the other hand some benefits will not cost the scheme a great deal as they cover eventualities that will only happen rarely. But if you're the one who needs them, then they are definitely worth having.
It's not always easy therefore to make direct comparisons between schemes. And of course you do not usually get a choice of schemes, simply a choice about whether to join or not to join, and almost any scheme is better than no scheme at all.
Many schemes have reduced their benefits in recent years as a way of reducing big deficits. Sometimes they have been fully negotiated. Sometimes they have been imposed. But even more employers have shut their salary related scheme to new members completely.
So if you get the chance to join a salary related scheme you are better off than the majority of the workforce.
However it's still useful to know whether your scheme is good or not, compared to other salary related schemes. Here is a list of issues to consider:
can you join it?
Many employers have closed their schemes to new members. Some schemes give you only a limited chance to join, so if you do not join when you start your job you cannot start later. Some may give a longer period to make up your mind, but you still need to watch this. Others may not let young people or those on low pay join.
what is the accrual rate?
The accrual rate is the rate at which your pension builds up each year in a DB scheme
The commonest rate is 1/80th, so anything above this (say 1/60th or 1/50th) is very good, and anything lower than this (say 1/100th) is less good. Cutting accrual rates has been one way that schemes have tried to close deficits in recent years, so more schemes now have lower rates such as 1/100th.
what is the contribution rate? (or how much you will have to pay, and how much your employer will put in).
With a DB scheme the employee's contribution is generally fixed, though may be varied from time to time. (With some pension funds facing difficulties in recent times, some employee contributions have increased.) The employer contribution may vary more over time as it needs to keep enough money in the scheme to cover its current and future liabilities – ie, the cost of the pensions it has to pay now and in the future.
Some schemes are non-contributory – the employers bear the whole cost of the scheme. This may be generous – or may simply mean you are getting a smaller salary than people doing similar jobs without a non-contributory scheme.
A rule of thumb is that six to eight per cent is a reasonable employee contribution for a quality, contracted-out pension scheme. To justify more than this a scheme would either need to be generous or a situation exist where the workforce agree to increase contributions to preserve a scheme in difficulties (which may be well worth doing).
The full cost of providing good quality benefits is likely to be between 25% and 30% of paybill, so if the employee contribution is 6 per cent then it’s likely your employer will be paying between 19% and 24%.
What counts as pensionable pay?
This depends entirely on the rules of your scheme. In general only basic pay will be pensionable, but some schemes may take other payments such as regular overtime into account. The member guide to your scheme should make this clear
What happens if I stop work and then return?
The minimum legal requirements for maternity and other family leave are explained in How will maternity or parental leave affect my pension? but many schemes do better than these legal minimums.
What about early retirement?
Depending on your scheme rules, you may be allowed to draw your pension early. In general, 55 is the minimum pension age, though there are some exceptions. You can read more about early retirement here
Can I take a lump sum when I retire?
Most pension schemes let you take a lump sum when you retire in return for a reduction in your pension. In other words you exchange part of your pension for cash up front. This is called “commuting” your pension. Tax rules prevent the lump sum being more than 25% of the value of your total pension value, measured using factors set by HMRC.
You can read more about pension lump sums here
What if I have to retire from ill health?
Scheme rules vary considerably on what benefits are available on ill health retirement. You can read more about this here
What are the death in service benefits?
Most schemes have some kind of death in service benefit which is made up of a lump sum and a pension for a spouse or partner. A lump sum of three times earnings and a half pension for a surviving partner is probably the most usual level. You can read more about benefits for your dependants here.
How much will my pension increase each year when I have retired?
You should expect your pension to be increased each year after you retire. There are some legal requirements which you can read more about here but your pension scheme rules may provide for better increases than the legal minimum.
What happens if I change my job?
Most people when they retire will have worked for a number of employers and will probably have saved for a number of different pensions.
If you leave a DB scheme and only retire later you will receive what is known as a deferred pension. This will be worked out from your salary when you leave the scheme and your years of service in the normal way, and then uprated in some way to take account of inflation. The law sets a complicated set of minimum standards for these increases. Most private sector schemes do no better than the legal minimum, so any improvement is an unusual bonus. You can read more about this here.
