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On Leaving The Employment
All occupational pension schemes must, by law, provide certain minimum rights on leaving the service of the employer. Discussions are taking place during 2012 with a view to making further improvements to these rights.
It used to be possible for a person leaving the service of an employer to be handed back in cash all the contributions he had made to the pension fund. For people now starting work this option is not always possible. The following are the existing alternative rights.
1. The right to a pension, based either on your own contributions to date, or on both your and your employer's contributions, is preserved for you, frozen ready for payment at retirement age.
2. Should you enter the employment of another company that operates a pension scheme, it may be possible for your pension rights to be transferred to the new employer's fund.
In the case of option 2 it will be necessary for both funds to agree to the transfer and for a single capital sum to be transferred from the old fund to the new one. In practice it is often found that some loss in rights takes place. If you elect for option 1 you will eventually receive two occupational pensions, one from each fund, and usually the total of the two pensions will be less than it would have been had you remained with one employer and enjoyed the same career structure (assuming the plans to be identical
Example
If you serve for 20 years with one employer, leaving while earning £6,000, your preserved pension might be, for example, 20/60ths of £6,000, which is £2,000. If your next 20 years are with another employer operating an exactly similar scheme, and if your final salary at retirement is £18,000, your pension from the second employer's fund will be 20/60ths of £18,000, which is £6,000. Total of both pensions will be £8,000. Had you enjoyed the same career and salary structure with a single employer your pension would have been 40/60ths of £18,000, which is £12,000.
The problems involved in transferability of pension rights are vexed ones and cannot be solved without pensions costing a great deal more than they do at present.
Contributions From Employer
Contributions from the employer are generally a great deal higher than those from the employee. An employer's contribution could be from 7% to 10% of wages. In a final-earnings pension scheme the size of the employer's contributions in the future is, in fact, unpredictable. This is because, since the employee's rate of contribution is fixed, the employer himself will have to bear the balance of whatever the cost of the benefits turns out to be. Thus in a final-earnings scheme the employer's liability is open-ended. This is in direct contrast with a 'money-purchase' scheme, where the employer knows precisely... see: Contributions From Employer