There are two main types of scheme.
Salary-related schemes
(Also known as 'defined-benefit' schemes).
The pension you receive is based on the number of years you have been in the scheme and how much you earn (usually your earnings when you retire or leave the scheme).
You usually pay contributions into the scheme in addition to those of your employer. If you contract out, and have a contracted-out salary-related scheme (COSRS), both you and your employer pay lower National Insurance contributions. The difference between this rate and the normal rate is known as the rebate. If a salary-related scheme is going to be able to contract out of the additional State Pension it must have passed a test of overall scheme quality, and a certificate will be issued by the scheme actuary to show this fact.
Money purchase schemes
(Also known as 'defined contribution' schemes).
This pension is similar to the salary-related scheme but is based on the total payments into the fund, and how well this has been invested. In general the longer your payments have been invested, the larger the pension you will get when you retire.
Most of these kinds of schemes have the option to buy an 'annuity' from the insurance company, which is an agreement to pay you a pension for life upon retirement. This can be transferred to your spouse should you die before they do. As with a salary related schemes, you can have a contracted-out money purchase scheme (COMPS).
The difference between COMPS and COSRS is that with COMPS the Inland Revenue will add an age-related based payment to your pension once a year. This addition will be based on your earnings, older people will get a higher addition than younger people, and this will allow them to build up a pension that reflects the additional State Pension that they have given up.
Tax Relief
Anyone paying contributions into an occupational pension is entitled to tax relief on their contributions. For someone on the basic rate of income tax, every �100 placed in your pension will earn a rebate of �22. On the highest level of income tax the same �100 will earn a rebate of �40. (Based on 2003/4 figures). As of 6 April 2003, all occupational pension schemes have had to provide members with an illustration of the amount of pension they might receive when they retire every year. You can use this illustration to ensure that you will have enough money going into your pension.
