Individual and occupational pension schemes
All schemes fall into one of two types
1) Final salary (defined benefit) - retirement benefits are calculated according to a formula of a fraction of final salary (usually 60th, 80th) x number of years of service. Usually only applicable to large occupational schemes ie. Public sector and large employers.
2) Money purchase (defined contribution) - retirement benefits are dependant on the contributions invested and the investment returns achieved on the fund up to date of taking benefits. Basis of individual schemes and majority of occupational schemes.

Individual pension schemes
Mainly individual personal pensions, stakeholder personal pensions, group personal pensions

Personal pension
Introduced July 1988. Individual pension plan effected in name of individual as savings vehicle for retirement benefits.

Stakeholder personal pension
Introduced April 2001. As above but subject to specific terms and conditions regarding charges, contributions, access and terms (CAT)

Eligibility
All individuals ordinarily resident in UK aged less than 75

Contributions
Maximum contribution is higher of £3600 (gross) or percentage ranging from 17.5% to 40% of net relevant earnings (including any employer contribution) according to age in the tax year contribution is made. No minimum contribution but for stakeholder provider cannot stipulate a minimum contribution in excess of £20.00 per month.
For occupational schemes the maximum employee contribution is 15% of earnings while there is no limit on employer contribution.

Net relevant earnings
Generally defined as gross remuneration minus allowable business expenses. For self employed total gross earnings minus deductions for calculating business profits and gains.

Tax treatment
1) Contributions - All contributions, including the self employed, are paid net of basic rate tax giving tax relief at source. The provider will gross up the contribution and reclaim the balance from Inland Revenue. Higher rate taxpayers receive the extra tax relief separately through PAYE coding system or self-assessment return.
2) Investment funds - Grow free of income tax and capital gains tax, however, are subject to tax at 10% on dividend income from UK equities.
3) Benefits - Part of fund up to 25% can be taken as tax free cash. The remainder of fund must be used to provide a pension which is subject to income tax as earned income. The 25% applies only to non protected rights part of fund, if there is a protected rights element (see below) this part of the fund can only be used to provide a pension.

Charges
For stakeholder pensions the maximum permitted is an annual management charge of 1% of fund value. For non-stakeholder charges may vary between providers according to factors such as fund selected etc.

Investment funds
Providers offer very wide choice of funds to cover customers attitude to risk/potential reward. These funds vary from low risk deposit or cash funds up to high risk/high reward specialist equity funds concentrated on specific geographical areas eg. Far East, Japan, USA.

Open market option
Policyholder has the option of obtaining a quotation from different providers for the income he can obtain from the fund invested. The income a given fund will provide is dependant on annuity rates which vary between different providers. Policyholder can obtain best annuity rate and conditions from whole market rather than be tied to original provider.

Contracting out
Both occupational schemes and personal pensions can be used to "contract out" of the earnings related part of the State Pension Scheme. These schemes are known as the State Earnings Related Pension Scheme (1978 to 2001) and SP2 (2001 to date). If contracted out a percentage of National Insurance contributions are re-directed to the occupational scheme or personal pension plan and invested.
In a Stakeholder or Personal Pension the part of the fund in respect of these National Contributions is known as Protected Rights and cannot be used to provide tax cash.

Dependants benefits
1) Stakeholder, Personal Pensions - Policyholder can choose to provide a dependants pension from ordinary (non protected rights) part of fund. The protected rights part of fund (if applicable) must include provision for a dependants pension.
2) Occupational schemes - All benefits including dependants will be stated in scheme rules applicable to specific scheme.

State Benefits Two elements:-
1) Basic pension - Flat rate pension payable to all subject to payment of minimum level of national insurance contributions over working life.

2) Earnings related element - Applicable to all "contracted in" employees. This pays a pension based on percentage of earnings over working life. Occupational or individual pension plans can be used to contract out of this.