FOOL SCHOOL
Moving And Improving Your Company Pension

December 3, 2004

In this article, we continue with our look at company pension schemes.

What happens when you change jobs

Under an occupational scheme, if you have worked for an employer for two years you get to keep the value of any pensions benefits that have built up if you change jobs. Either you can keep the 'preserved benefits' in the old scheme, or you can get the old scheme to transfer enough money (called the 'transfer value') to the new scheme to give you the same benefits that you had already built up in the old scheme.

Whether your better to keep your "preserved benefit" or "transfer" to a new scheme is always a tricky question. In theory there should be no difference as you should be able to invest the transfer value elsewhere and get the same final pension pot. But it's very difficult to check if this is the case. The trouble with transferring is that it often costs you money to do it (some old schemes make very high charges in these instances) and that would make the transfer value less than what you'd have if you left the preserved benefits alone. This is one situation where it usually makes sense to seek professional financial advice, especially if large sums are involved.

With people changing jobs more frequently these days, some are ending up with lots of little pension policies scattered around. That makes even more difficult to keep track of them all, and work out how much you need to continue adding to your pension. Many people prefer to lump them all together in a personal pension. A Stakeholder pension or a cheap Self-Invested Personal Pension (SIPP) is well suited to this. If you have worked for less than two years with an employer, you basically just get back any contributions that you've put in.

Additional Voluntary Contributions

'AVCs' and 'FSAVCs' are an option for people who are members of an occupational scheme, but who don't think their benefits are going to be enough. AVC schemes are run by your employer. They enable people to top their pension contributions up to the maximum allowed. AVC stands for Additional Voluntary Contribution. In fact, if your employer offers an occupational pension, then it has to offer you an AVC if there's a demand for it. There are also things called ' Free-Standing AVCs' or 'FSAVCs'. These are like a private version of an AVC and, if you're a member of an occupational scheme, then you can use one to top-up your contributions completely independently of your employer.

As you might imagine, an AVC (or FSAVC) for a defined contribution pension just increases your contributions, although they might be in a slightly different place from your main scheme. Where an AVC scheme is available for a defined benefit pension scheme (generally only in the public sector), your contributions can purchase 'added years'. In other words, you are buying extra years to be taken into account in calculating your final salary benefits.

An AVC, sponsored by your employer, has an advantage over an FSAVC because of 'economies of scale'. In other words, by grouping together with your fellow employees, the overall charges tend to be lower. FSAVCs are very similar to the Personal Pensions. They also have many of the same drawbacks, in that they often charge too much and your fund can often be channelled into poorly performing investments. Some funds make an upfront charge every time you alter the amount you want to pay in. The bottom line on this is that, if you have an occupational pension scheme and want to increase your contributions, an in-house AVC scheme is likely to be a far more attractive option than an FSAVC.

> Find out more about pensions here.