Company Pension Schemes

3. The Rules

3.1 The significant tax relief available on pension schemes means there are limits on how much tax relief employees can claim on the amounts paid in for pensions.

• Individuals can contribute annual earnings of up to £235,000 (the annual allowance for 2008/09) free of tax.
• To the extent that the employee's plus employer's annual contributions, or the annual growth in the value of the employee's pension funds exceed the annual allowance, they will be taxed at 40 per cent.
• There is also a lifetime allowance set at £1.65 million for 2008/09.
• To the extent that total savings exceed the lifetime allowance when benefits are taken, they will be taxed at 25 per cent (if taken as income) or 55 per cent (if taken as a lump sum).
• Unearned income can also be paid into pension arrangements, but only the first £3,600 in any year can be paid in free of tax.

3.2 Special considerations apply when new employees join a company.

• Schemes may accept transfers from other company schemes or personal plans.
• Tell employees about your scheme but do not make any direct recommendations.

3.3 Occupational schemes must offer employees who leave employment several options.

• Those with three months' service or more, who leave employment within two years can choose to have their contributions transferred to an occupational or personal pension scheme. Or they can have a refund of contributions minus a tax charge to repay tax relief given.
• Employees who change jobs after two years' scheme membership can defer their pension entitlements into a new employer's pension scheme or a personal pension scheme, or defer them by leaving them in the company scheme.
• Deferred final salary pensions must grow over the period of deferment by the lower of inflation or 5 per cent.
• Deferred money purchase pension schemes get the full benefit of investment growth between leaving and retirement.

3.4 All pensions paid out by company schemes must be increased by the lower of inflation or 5 per cent each year, in respect of contributions or service after 5 April 1997.

3.5 Schemes must not be discriminatory.

• Men and women must have equal pension ages. Most schemes have equalised at 65.
• Companies must not exclude part-time employees from membership.

3.6 Scheme members must be provided with the following information on request.

• Details of the scheme rules.
• The scheme's annual report and accounts.
• An annual statement detailing the pension benefits the employee is entitled to. Statements must be issued automatically for members of money purchase schemes.