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Wednesday, 3 October 2012

Options when you take your company pension

Your company ('occupational') pension scheme has rules about when you can retire and take your pension. It's a good idea to check with your pension scheme administrator what options are available to you. However, there are some common elements to all company schemes.

How much company pension you will get

The amount of company pension you get will depend on which type of pension scheme you are a member of. It’s likely to be one of two types:

Final salary scheme

The amount of pension you get is based on your salary and the number of years you've been in the scheme.

Money purchase scheme

With a money purchase scheme your pension is based on how much you and your employer have contributed and the interest it's earned. At retirement, your fund is used to provide your pension, often by buying an annuity (a regular income for life). How much your fund will provide is calculated using an 'annuity rate'. This depends on various things, including your age and sex, and interest rates at the time.

Options with a final salary scheme

You can ask your pension administrator about the rules of your particular scheme. For instance, some schemes don't allow you to take your benefits until age 65, but others may let you take them earlier.

You may be given the option to take part of your pension as a tax-free lump sum and receive a smaller monthly income.

Your pension administrator can provide you with a forecast of what your pension will pay when you retire, or ill-health stops you working. You can also ask what benefits your dependants will receive if you die before them.

Options with a money purchase scheme

When you retire, you can choose to take part of your pension as a tax-free lump sum and use the rest to buy an annuity. An annuity is a regular income for life.

Buying an annuity

There are several types of annuity on the market. It's important to remember that once you've bought one, you probably won't be allowed to change it later on.

You may not have to buy an annuity from the pension administrator suggested by your company's scheme. But there may be charges for transferring your funds. It's advisable to check all the options and take professional advice before making any decisions.

What if I don't wish to buy an annuity?

If you don't want to buy an annuity straight away, you may be able to opt for a 'drawdown pension' instead. However, very few occupational schemes offer this as an alternative.

Your scheme administrator will be able to tell you if you can do this.

Drawdown pension

This lets you draw an income from your pension fund which continues to be invested in the scheme until you buy an annuity. Unlike an annuity, the amount you receive is reviewed every three years while you're under age 75, or every year if you're 75 or over.

The amount you get is determined by HM Revenue & Customs (HMRC) and Department for Work and Pensions (DWP) rules.

If a drawdown pension is an option in your scheme, your administrator will let you know how much income you will get under this arrangement.

If your occupational scheme doesn't offer a drawdown pension, you may wish to consider transferring your benefits to a personal pension scheme that does. Ideally, you should take independent advice before you make a decision.

Working part-time

Since April 2006, you may not have to leave your job to draw a pension.

Instead, you may be able to draw all, or some, of your pension while still working full or part-time for the same employer. What you can do will depend on the rules of your scheme.

Getting advice on company pensions

It's a good idea to get advice about your company pension before making any decisions – a number of places offer advice and information.

Your company pension scheme administrator

Your company pension scheme should have an administrator who can provide you with specific advice about your scheme.

The Pensions Advisory Service (TPAS)

For general information on company pensions, you can contact TPAS.

The Pensions Regulator

If you're worried about the way your company pension scheme is run, you can contact The Pensions Regulator (formerly the Occupational Pensions Regulatory Authority).

Financial adviser

You can also talk to a financial adviser about your company pension scheme, particularly if you're thinking of transferring your fund to a personal pension.

Getting financial advice doesn't necessarily mean you have to pay a fee, but it's best to check beforehand.

More useful links

Additional links

Being enrolled into a workplace pension

Starting from October 2012, millions of workers will be enrolled into a workplace pension

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