UK pension provision
Encyclopedia
Pensions in the United Kingdom fall into seven major divisions; Basic State Pension, State Second Pension (S2P), Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions. Personal accounts, automatic enrolment and the minimum employer contribution will be new policies joining these from 2012.
The state
provides basic pension provision intended to prevent poverty in old age. Until 2010 men over the age of 65 and women over the age of 60 were entitled to claim state pension; from April 2010 the age for women is gradually being raised to match that for men. Longer-term, the retirement age for both men and women will rise to 68 by no later than 2046 and possibly much earlier.
The basic state pension, then known as the "Old Age Pension" was introduced in the United Kingdom (including Ireland) in January 1909. A pension of 5 shillings per week (25p, equivalent, using the Consumer Price Index
, to £ in present day terms), or 7s.6d per week (equivalent to £ today) for a married couple, was payable to a person with an income below £21 per annum (equivalent to £ today), following the passage of the Old Age Pensions Act 1908. The qualifying age was 70, and the pensions were subject to a means test
.
that imprisoned beggars. During Elizabethan times, English poor laws
represented a shift whereby the poor were seen merely as morally degenerate, and were expected to perform forced labour in workhouse
s.
The beginning of the modern state pension was the Old Age Pensions Act 1908, that provided £31.50 a year for those over 70. It coincided with the Royal Commission on the Poor Laws and Relief of Distress 1905-09
and was the first step in the Liberal welfare reforms to the completion of a system of social security, with unemployment and health insurance through the National Insurance Act 1911
.
After the war, the National Insurance Act 1946
completed universal coverage of social security. The National Assistance Act 1948
formally abolished the poor law, and gave a minimum income to those not paying national insurance.
The early 1990s established the existing framework for state pensions in the Social Security Contributions and Benefits Act 1992
and Superannuation and other Funds (Validation) Act 1992. Following the highly respected Goode Report, occupational pensions were covered by comprehensive statutes in the Pension Schemes Act 1993
and the Pensions Act 1995
.
In 2002 the Pensions Commission
was established as a cross party body to review pensions in the United Kingdom. The first Act to follow was the Pensions Act 2004
that updated regulation by replacing OPRA with the Pensions Regulator and relaxing the stringency of minimum funding requirements for pensions, while ensuring protection for insolvent businesses. In a major update of the state pension, the Pensions Act 2007
, which aligned and raised retirement ages. Following that, the Pensions Act 2008
has set up automatic enrolment for occupational pensions, and a public competitor designed to be a low-cost and efficient fund manager, called the National Employment Savings Trust (or "Nest").
Unlike the Basic State Pension, participation in the Additional Pension schemes is voluntary. Those who do not wish to participate can contract out. This option was introduced with SERPS in 1978 and is only available to those who have made alternative pension arrangements through Personal or Occupational schemes. Further changes to be introduced in 2012 will see S2P change from an "earnings related" to a "flat rate" pension, and individuals will lose the right to contract out.
, the Pensions Act 1995
and the Pensions Act 2008
.
arrangements instead. In this arrangement, the employer (and sometimes also the employee) makes regular payments (typically a percentage of salary)into a pension fund, and the fund is used to buy a pension when the employee retires. So the amount of pension depends on a number of factors including the accumulated amount of the fund, interest rates and projected mortality rates at the time the individual retires.
, whose assets will be used to provide benefits in due course.
Prior to April 2006 schemes were 'approved' by HMRC rather than registered. Approval placed certain limits on the benefits which could be provided, which led to a growth of 'unapproved' (i.e. without the generous tax treatment) retirement arrangements - these unapproved schemes were commonly distinguished by reference to their funding status (funded unapproved retirement benefit schemes FURBS and unfunded unapproved retirement benefit schemes UURBS).
, where the member is allowed to direct what their contributions should be invested in).
onwards. Such pensions were very frequently attached as salaries to places which were sinecures, or, just as often, posts which were really necessary were grossly overpaid, while the duties were discharged by a deputy at a small salary.
Prior to the reign of Queen Anne
, such pensions and annuities were charged on the hereditary revenues of the sovereign and were held to be binding on the sovereign's successors. By the Taxation, etc. Act 1702 (I Anne c. 7) it was provided that no portion of the hereditary revenues could be charged with pensions beyond the life of the reigning sovereign. This act did not affect the hereditary revenues of Ireland and Scotland, and many persons were quartered, as they had been before the act, on the Irish and Scottish revenues who could not be provided for in England for example, the Duke of St Albans
, illegitimate son of Charles II, had an Irish pension of £800 a year (£ today); Catherine Sedley, mistress of James II
, had an Irish pension of £5,000 a year; the Duchess of Kendall and the Countess of Darlington, respectively mistress and half-sister of George I
, had pensions of the united annual value of £5,000 (£ today), while Madame de Wallmoden
, a mistress of George II
, had a pension of £3,000 (£ today).
These pensions had been granted in every conceivable form during the pleasure of the Crown
, for the life of the sovereign, for terms of years, for the life of the grantee, and for several lives in being or in reversion (Erskine May, Constitutional History of England). On the accession of George III and his surrender of the hereditary revenues in return for a fixed civil list, this civil list
became the source from which the pensions were paid. The three pension lists of England, Scotland and Ireland were consolidated in 1830, and the civil pension list reduced to finance the remainder of the pensions being charged on the Consolidated Fund
.
In 1887 Charles Bradlaugh
MP protested strongly against the payment of perpetual pensions, and as a result a committee of the House of Commons
inquired into the subject (Report of Select Committee on Perpetual Pensions, 248, 1887). An appendix to the Report contains a detailed list of all hereditary pensions, payments and allowances in existence in 1881, with an explanation of the origin in each case and the ground of the original grant; there are also shown the pensions, etc., redeemed from time to time, and the terms upon which the redemption took place. The nature of some of these pensions may be gathered from the following examples:
All these pensions were for services rendered, and although justifiable from that point of view, a preferable policy is pursued in the 20th century, by Parliament voting a lump sum, as in the cases of Lord Kitchener
in 1902 (£50,000) and Lord Cromer
in 1907 (£50,000).
Charles II granted the office of Receiver-General and Controller of the Seals of the Court of Kings Bench and Common Pleas to the Duke of Grafton
. This was purchased in 1825 from the duke for an annuity of £843, which in turn was commuted in 1883 for a sum of £22,714 12s. 8d. To the same duke was given the Office of the Pipe
or Remembrancer of First-Fruits and Tenths of the Clergy
. This office was sold by the duke in 1765 and, after passing through various hands, was purchased by one R. Harrisor in 1798. In 1835 on the loss of certain fees the holder was compensated by a perpetual pension of £62 9s. 8d. The Duke of Graftol also possessed an annuity of £6,870 in respect of the commutator of the dues of butlerage
and prisage.
To the Duke of St Albans
was granted in 1684 the office of Master of the Hawks
. The sum granted by the original patent were: Master of Hawks, salary £391 1s. 5d.; four falconers at £50 per annum each, £200; provision of hawks, £600; provision of pigeons, hens and other meats £182 10s.; total, £1373 11s. 5d. This amount was reduced by office fees and other deductions to £965, at which amount it stood until commuted in 1891 for £18,335.
To the Duke of Richmond
and his heirs was granted in 1676 a duty of one shilling per ton of all coals exported from the Tyne
for consumption in England. This was redeemed in 1799 for an annuity of £19,000 (chargeable on the consolidated fund), which was afterwards redeemed for £633,333.
The Duke of Hamilton
, as hereditary keeper of the palace of Holyrood House, received a perpetual pension of £45,105 and the descendants of the heritable usher of Scotland drew a salary of £242 10s.
The conclusions of the committee were that pensions allowances and payments should not in future be granted in perpetuity, on the ground that such grants should be limited to the persons actually rendering the service, and that such reward should be defrayed by the generation benefited; that offices with salaries and without duties, or with merely nominal duties, ought to be abolished; that all existing perpetual pensions and payments and all hereditary offices should be abolished: that where no service or merely nominal service is rendered by the holder of an hereditary office or the original grantee of a pension, the pension or payment should in no case continue beyond the life of the present holder and that in all cases the method of commutation ought to ensure a real and substantial saving to the nation (the existing rate, about 27 years purchase, being considered by the committee to be too high). These recommendations of the committee were adopted by the government and outstanding hereditary pensions were gradually commuted, the only ones left outstanding being those to Lord Rodney (£2,000) and to Lord Nelson (£5,000), both chargeable on the Consolidated Fund.
as they either reward a career in domestic politics or are awarded in the colonial context not on grounds of justice, contract
or socio-economic merits, but as a political decision, in order to take a politically significant person (often deemed a potential political danger) out of the picture by paying him or her off, regardless of seniority.
upon the recommendation of the First Lord of the Treasury
. They were to be "granted to such persons only as have just claims on the royal beneficence or who by their personal services to the Crown, or by the performance of duties to the public, or by their useful discoveries in science and attainments in literature and the arts, have merited the gracious consideration of their sovereign and the gratitude of their country." As of 1911, a sum of £1,200 was allotted each year from the Civil List, in addition to the pensions already in force. From a Return issued in 1908, the total of Civil List pensions payable in that year amounted to £24,665.
, on completing fifteen years services or becoming permanently incapacitated for duty, whatever their length of service, may be granted a pension equal to two-thirds of their salary (Supreme Court of Judicature Act 1873
). The Lord Chancellor
of Great Britain however short a time he may have held office, receives a pension of £45,000, but he usually continues to sit as a Law Lord in the House of Lords; so also does the Lord Chancellor of Northern Ireland, who receives a pension of £3,692 6s. A considerable number of local authorities have obtained special parliamentary powers for the purpose of superannuating their officials and workmen who have reached the age of 65. Poor law officers receive superannuation allowances under the Poor Law Officers Superannuation Act 1864–1897.
in 1693 and regularly established by an order in council of Queen Anne in 1700. Since then the rate of pensions has undergone various modification and alterations; the full regulations concerning pensions to all ranks will be found in the quarterly Navy List, published by authority of the Admiralty. In addition to the ordinary pension there are also good-service pensions, Greenwich Hospital pension and pensions for wounds.
An officer is entitled to a pension when he is retired at the age of 45, or if he retires between the ages c 40 and 45 at his own request, otherwise he receives only half pay. The amount of his pension depends upon his rank, length of service and age. As an example, in past, the maximum retired pay of an admiral was £850 per annum, for which 30 years service or its equivalent in half-pay time is necessary; he may, in addition, have held a good service pension of 300 per annum. The maximum retired pay of a vice-admiral with 29 years service was £725; of rear-admirals with 27 years service, £600 per annum. Pensions of captains who retire at the age of 55, commanders, who retire at 50, and lieutenants who retire at 45, ranged from £200 per annum for 17 years service to £525 for 24 years service. The pensions of other officers were calculated in the same way, according to age and length of service.
The good-service pensions consisted of ten pensions of £300 per annum for flag-officers, two of which may be held by vice-admirals and two by rear-admirals; twelve of £150 for captains; two of £200 a year and two of £150 a year for engineer officers; three of 100 a year for medical officers of the navy; six of £200 a year for general officers of the Royal Marines and two of £150 a year for colonels and lieutenant-colonels of the same. Greenwich Hospital pensions range from £150 a year for flag officers to £25 a year for warrant officers. All seamen and marines who have completed twenty-two years service are entitled to pensions ranging from 1d. a day to a maximum of 1s. 2d. a day, according to the number of good-conduct badges, together with the good-conduct medal, possessed. Petty officers, in addition to the rates of pension allowed them as seamen, are allowed for each years service in the capacity of superior petty officer, 15s. 2d. a year, and in the capacity of inferior petty officer 7s. 7d. a year.
Men who are discharged from the service on account of injuries and wounds or disability attributable to the service are pensioned with sums varying from 6d. a day to 2s. a day. Pensions are also given to the widows of officers in certain circumstances and compassionate allowances made to the children of officers. In the Navy estimates for 1908–1909 the amount required for halfpay and retired-pay was £868,800, and for pensions, gratuities and compassionate allowances £1,334,600, a total of £2,203,400.
, details levels of income, saving and pension provision for a representative selection of UK households and is the source for the table below for UK employees (Table 7.12):
Most employees over the state pension age of 65 would not have pension provision as part of their salary and benefits - they may well however be receiving income from a pension from previous employment
State pensions Acts
Private pensions Acts
The state
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...
provides basic pension provision intended to prevent poverty in old age. Until 2010 men over the age of 65 and women over the age of 60 were entitled to claim state pension; from April 2010 the age for women is gradually being raised to match that for men. Longer-term, the retirement age for both men and women will rise to 68 by no later than 2046 and possibly much earlier.
The basic state pension, then known as the "Old Age Pension" was introduced in the United Kingdom (including Ireland) in January 1909. A pension of 5 shillings per week (25p, equivalent, using the Consumer Price Index
Consumer price index
A consumer price index measures changes in the price level of consumer goods and services purchased by households. The CPI, in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of...
, to £ in present day terms), or 7s.6d per week (equivalent to £ today) for a married couple, was payable to a person with an income below £21 per annum (equivalent to £ today), following the passage of the Old Age Pensions Act 1908. The qualifying age was 70, and the pensions were subject to a means test
Means test
A means test is a determination of whether an individual or family is eligible for help from the government.- Canada :In Canada means tests are used for student finance , and "welfare" . They are not generally used for primary education and secondary education which are tax-funded...
.
History
Until the 20th century, poverty was seen as a quasi-criminal state, and this was reflected in the Vagabonds and Beggars Act 1495Vagabonds and Beggars Act 1495
The Vagabonds and Beggars Act 1495 was an Act of Parliament passed during the reign of Henry VII. The Act stated that: "Vagabonds, idle and suspected persons shall be set in the stocks for three days and three nights and have none other sustenance but bread and water and then shall be put out of...
that imprisoned beggars. During Elizabethan times, English poor laws
English Poor Laws
The English Poor Laws were a system of poor relief which existed in England and Wales that developed out of late-medieval and Tudor-era laws before being codified in 1587–98...
represented a shift whereby the poor were seen merely as morally degenerate, and were expected to perform forced labour in workhouse
Workhouse
In England and Wales a workhouse, colloquially known as a spike, was a place where those unable to support themselves were offered accommodation and employment...
s.
The beginning of the modern state pension was the Old Age Pensions Act 1908, that provided £31.50 a year for those over 70. It coincided with the Royal Commission on the Poor Laws and Relief of Distress 1905-09
Royal Commission on the Poor Laws and Relief of Distress 1905-09
The Royal Commission on the Poor Laws and Relief of Distress 1905-09 was a body set up by the British Parliament in order to investigate how the Poor Law system should be changed...
and was the first step in the Liberal welfare reforms to the completion of a system of social security, with unemployment and health insurance through the National Insurance Act 1911
National Insurance Act 1911
The National Insurance Act 1911 is an Act of Parliament of the United Kingdom. The Act is often regarded as one of the foundations of modern social welfare in the United Kingdom and forms part of the wider social welfare reforms of the Liberal Government of 1906-1914...
.
After the war, the National Insurance Act 1946
National Insurance Act 1946
The National Insurance Act 1946 was a British Act of Parliament which established a comprehensive system of social security throughout the United Kingdom...
completed universal coverage of social security. The National Assistance Act 1948
National Assistance Act 1948
The National Assistance Act 1948 was an Act of Parliament passed in the United Kingdom by the Labour government of Clement Attlee.-Overview:It formally abolished the Poor Law system which had existed since the reign of Elizabeth I, and established a social safety-net for those who didn’t pay...
formally abolished the poor law, and gave a minimum income to those not paying national insurance.
The early 1990s established the existing framework for state pensions in the Social Security Contributions and Benefits Act 1992
Social Security Contributions and Benefits Act 1992
The Social Security Contributions and Benefits Act 1992 is the primary legislation concerning the state retirement provision, accident insurance, statutory sick pay and maternity pay in the United Kingdom.-Contents:*Part I Contributions...
and Superannuation and other Funds (Validation) Act 1992. Following the highly respected Goode Report, occupational pensions were covered by comprehensive statutes in the Pension Schemes Act 1993
Pension Schemes Act 1993
The Pension Schemes Act 1993 is a United Kingdom Act of Parliament that concerns the administration of occupational pensions.-Background:...
and the Pensions Act 1995
Pensions Act 1995
The Pensions Act 1995 is a piece of United Kingdom legislation to improve the running of pension schemes.-Background:Following the death of Robert Maxwell it became clear that he had embezzled a large amount of money from the pension fund of Mirror Group Newspapers...
.
In 2002 the Pensions Commission
Pensions Commission
The Pensions Commission was a non-departmental public body in the United Kingdom, reporting to the Secretary of State for Work and Pensions, set up to keep under review the regime for UK private pensions and long-term savings....
was established as a cross party body to review pensions in the United Kingdom. The first Act to follow was the Pensions Act 2004
Pensions Act 2004
The Pensions Act 2004 is an Act of the Parliament of the United Kingdom to improve the running of pension schemes.-Background:In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing to offer the protection to pension scheme members that had...
that updated regulation by replacing OPRA with the Pensions Regulator and relaxing the stringency of minimum funding requirements for pensions, while ensuring protection for insolvent businesses. In a major update of the state pension, the Pensions Act 2007
Pensions Act 2007
The Pensions Act 2007 is an Act of the Parliament of the United Kingdom. It incorporated the main findings of the all-party Pensions Commission in 2006 as set out in the white paper Security in retirement: towards a new pension system published in May 2006.The key provisions were:#Reduction of the...
, which aligned and raised retirement ages. Following that, the Pensions Act 2008
Pensions Act 2008
The Pensions Act 2008 is an Act of the Parliament of the United Kingdom. The principal change brought about by the Act is that all workers will have to opt out of an occupational pension plan of their employer, rather than opt in...
has set up automatic enrolment for occupational pensions, and a public competitor designed to be a low-cost and efficient fund manager, called the National Employment Savings Trust (or "Nest").
State pensions
State pension comprises three main elements – the basic pension, additional pensions, and pension guarantee. These are described in the following sections.Additional Pension
Three different state schemes have existed to provide extra pension provision above the Basic State Pension (BSP). These are collectively known as Additional Pension. They have been available only to employees paying National Insurance contributions and to certain exempted groups (not including the self employed). The three schemes are/were:- Graduated Pension or Graduated Retirement Benefit
- This was earned between 6 April 1961 and 5 April 1975. Qualification was based on payment of a number of fixed National Insurance payments ('stamps'). Graduated pension typically pays a small amount (£1 or so per week) to those entitled to it.
- State Earnings-Related Pension SchemeState Earnings-Related Pension SchemeThe State Earnings Related Pension Scheme was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when it was replaced by the State Second Pension....
(SERPS)
- State Earnings-Related Pension Scheme
- SERPS ran from 6 April 1978 to 5 April 2002. As the name implies, the level of pension payable was related to earnings via the amount of National Insurance contributions. Qualification was based on band earnings above a Lower Earnings Limit (LEL) in each year. The LEL (£84 per week /£4368 pa in 2006/07) was usually set at the same level as the BSP (£84.25) and increased when BSP did. Band earnings were those between the LEL and an Upper Earnings Limit (UEL) at which National Insurance contributions ceased to be payable by the employee (this was £645 per week/£2,795 per month in 2006/07, although the UEL now refers to a threshold where reduced NI payments are made, as opposed to payment ceasing). The UEL is also adjusted annually.
- State Second PensionState Second PensionThe State Second Pension, or S2P, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS...
(S2P)
- State Second Pension
- S2P was introduced on 6 April 2002. As with SERPS, the level of pension payable is related to the recipients earnings via their National Insurance contributions. Qualification is based on earnings at, or above, the LEL, but no band earning calculation is made until earnings reach a higher base (£12,500 pa in 2006/07) called the Lower Earnings Threshold (LET). Earnings below the LET (but above the LEL) are credited up to the LET.
Unlike the Basic State Pension, participation in the Additional Pension schemes is voluntary. Those who do not wish to participate can contract out. This option was introduced with SERPS in 1978 and is only available to those who have made alternative pension arrangements through Personal or Occupational schemes. Further changes to be introduced in 2012 will see S2P change from an "earnings related" to a "flat rate" pension, and individuals will lose the right to contract out.
Occupational pensions
Occupational pension schemes are arrangements established by employers to provide pension and related benefits for their employees. These are created under the Pension Schemes Act 1993Pension Schemes Act 1993
The Pension Schemes Act 1993 is a United Kingdom Act of Parliament that concerns the administration of occupational pensions.-Background:...
, the Pensions Act 1995
Pensions Act 1995
The Pensions Act 1995 is a piece of United Kingdom legislation to improve the running of pension schemes.-Background:Following the death of Robert Maxwell it became clear that he had embezzled a large amount of money from the pension fund of Mirror Group Newspapers...
and the Pensions Act 2008
Pensions Act 2008
The Pensions Act 2008 is an Act of the Parliament of the United Kingdom. The principal change brought about by the Act is that all workers will have to opt out of an occupational pension plan of their employer, rather than opt in...
.
Defined benefit/final salary schemes
Traditionally, a large number of UK employers offered their employees access to a defined benefit occupational pension scheme, often based on final salary. In such an arrangement, the employee was typically promised a pension of a fixed proportion of their salary in the period leading up to retirement. The proportion would depend on the number of years of service with the employer. Post retirement increases are typically partly discretionary. The amounts payable are restricted by taxation rules, the maximum being typically either a pension of one-sixtieth of final salary for each year of membership or a pension of one-eightieth of their salary per year of membership plus a tax free lump sum of three-eightieths. With increases in longevity and reductions in interest rates, such arrangements have progressively become unaffordable.Defined contribution/money purchase schemes
Over recent years, many employers have closed their defined benefit schemes to new members, and established defined contribution or money purchaseMoney Purchase
A Money Purchase scheme is a type of pension arrangement in the United Kingdom.It can either be sponsored by an employer or an individual arrangement . Basically, with this type of arrangement a sum of money is accrued which is then used to secure an income at retirement...
arrangements instead. In this arrangement, the employer (and sometimes also the employee) makes regular payments (typically a percentage of salary)into a pension fund, and the fund is used to buy a pension when the employee retires. So the amount of pension depends on a number of factors including the accumulated amount of the fund, interest rates and projected mortality rates at the time the individual retires.
Funding
UK occupational pension schemes are typically jointly funded by the employer and the employees. These are called "contributory pension schemes" since the employee contributes - typically something in the region of 6% of salary, tax free. "Non contributory pension schemes" are where the employer funds the scheme with no contribution from the individual. Contributions are typically put into a separate trustTrust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
, whose assets will be used to provide benefits in due course.
Tax registration
Most schemes are also registered for tax purposes, which gives the scheme various tax advantages – assets grow free from income tax, capital gains tax and corporation tax, employees can normally make contributions out of their gross (untaxed) income, and employer contributions are generally tax deductible. Only funded schemes can be registered.Prior to April 2006 schemes were 'approved' by HMRC rather than registered. Approval placed certain limits on the benefits which could be provided, which led to a growth of 'unapproved' (i.e. without the generous tax treatment) retirement arrangements - these unapproved schemes were commonly distinguished by reference to their funding status (funded unapproved retirement benefit schemes FURBS and unfunded unapproved retirement benefit schemes UURBS).
Individual or personal pensions
It is also possible for an individual to make contributions under an arrangement they themselves make with a provider (such as an insurance company). Similar tax advantages will usually be available as for occupational schemes. Contributions are typically invested during an individual's working life, and then used to purchase a pension at or following retirement. Various names are given to different types of individual arrangement, but they are not fundamentally different in nature. The generic term personal pension is used to refer to arrangements established since the rules were liberalised in the 1980s (earlier arrangements are usually called retirement annuity contracts), but can be subdivided into other types (such as the Self-invested personal pensionSelf-invested personal pension
A Self-Invested Personal Pension is the name given to the type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs ....
, where the member is allowed to direct what their contributions should be invested in).
Stakeholder pensions
Stakeholder pensions (insured personal pensions, with charges capped at a low level) are a form of pension arrangement designed to be easily understandable and available. Stakeholder pension are in effect personal pension schemes set up on terms which meet standards set by the government (for example there are restrictions on the charges the provider may make). Although a stakeholder pension is a personal pension, they can (and in some circumstances must) be offered by an employer as a cost-effective way of providing pension cover for their workforce.Group personal pensions
Group personal pensions are another pension arrangement that are personal pensions, but are linked to an employer. A group personal pension plan (GPPP) can be established by an employer as a way of providing all of its employees with access to a pension plan run by a single provider. By grouping all the employees together in this way, it is normally possible for the employer to negotiate favourable terms with the provider, thus reducing the cost of pension provision to the employees. The employer will also normally contribute to the GPPP.Perpetual or hereditary pensions
Perpetual pensions were freely granted either to favourites or as a reward for political services from the time of Charles IICharles II of England
Charles II was monarch of the three kingdoms of England, Scotland, and Ireland.Charles II's father, King Charles I, was executed at Whitehall on 30 January 1649, at the climax of the English Civil War...
onwards. Such pensions were very frequently attached as salaries to places which were sinecures, or, just as often, posts which were really necessary were grossly overpaid, while the duties were discharged by a deputy at a small salary.
Prior to the reign of Queen Anne
Anne of Great Britain
Anne ascended the thrones of England, Scotland and Ireland on 8 March 1702. On 1 May 1707, under the Act of Union, two of her realms, England and Scotland, were united as a single sovereign state, the Kingdom of Great Britain.Anne's Catholic father, James II and VII, was deposed during the...
, such pensions and annuities were charged on the hereditary revenues of the sovereign and were held to be binding on the sovereign's successors. By the Taxation, etc. Act 1702 (I Anne c. 7) it was provided that no portion of the hereditary revenues could be charged with pensions beyond the life of the reigning sovereign. This act did not affect the hereditary revenues of Ireland and Scotland, and many persons were quartered, as they had been before the act, on the Irish and Scottish revenues who could not be provided for in England for example, the Duke of St Albans
Charles Beauclerk, 1st Duke of St Albans
Charles Beauclerk, 1st Duke of St Albans, KG was an illegitimate son of King Charles II of England by his mistress Nell Gwynne.-Life:...
, illegitimate son of Charles II, had an Irish pension of £800 a year (£ today); Catherine Sedley, mistress of James II
James II of England
James II & VII was King of England and King of Ireland as James II and King of Scotland as James VII, from 6 February 1685. He was the last Catholic monarch to reign over the Kingdoms of England, Scotland, and Ireland...
, had an Irish pension of £5,000 a year; the Duchess of Kendall and the Countess of Darlington, respectively mistress and half-sister of George I
George I of Great Britain
George I was King of Great Britain and Ireland from 1 August 1714 until his death, and ruler of the Duchy and Electorate of Brunswick-Lüneburg in the Holy Roman Empire from 1698....
, had pensions of the united annual value of £5,000 (£ today), while Madame de Wallmoden
Amalie von Wallmoden, Countess of Yarmouth
Amalie Sophie Marianne von Wallmoden, 1st Countess of Yarmouth was the mistress of George II of Great Britain from the mid-1730s until his death in 1760. Born into one prominent family in Hanover and wed into another, she became a naturalised citizen of Britain in 1740 and was granted the life...
, a mistress of George II
George II of Great Britain
George II was King of Great Britain and Ireland, Duke of Brunswick-Lüneburg and Archtreasurer and Prince-elector of the Holy Roman Empire from 11 June 1727 until his death.George was the last British monarch born outside Great Britain. He was born and brought up in Northern Germany...
, had a pension of £3,000 (£ today).
These pensions had been granted in every conceivable form during the pleasure of the Crown
The Crown
The Crown is a corporation sole that in the Commonwealth realms and any provincial or state sub-divisions thereof represents the legal embodiment of governance, whether executive, legislative, or judicial...
, for the life of the sovereign, for terms of years, for the life of the grantee, and for several lives in being or in reversion (Erskine May, Constitutional History of England). On the accession of George III and his surrender of the hereditary revenues in return for a fixed civil list, this civil list
Civil list
-United Kingdom:In the United Kingdom, the Civil List is the name given to the annual grant that covers some expenses associated with the Sovereign performing their official duties, including those for staff salaries, State Visits, public engagements, ceremonial functions and the upkeep of the...
became the source from which the pensions were paid. The three pension lists of England, Scotland and Ireland were consolidated in 1830, and the civil pension list reduced to finance the remainder of the pensions being charged on the Consolidated Fund
Consolidated Fund
Consolidated Fund or the Consolidated Revenue Fund is the term used for the main bank account of the government in many of the countries in the Commonwealth of Nations.-Establishment:...
.
In 1887 Charles Bradlaugh
Charles Bradlaugh
Charles Bradlaugh was a political activist and one of the most famous English atheists of the 19th century. He founded the National Secular Society in 1866.-Early life:...
MP protested strongly against the payment of perpetual pensions, and as a result a committee of the House of Commons
British House of Commons
The House of Commons is the lower house of the Parliament of the United Kingdom, which also comprises the Sovereign and the House of Lords . Both Commons and Lords meet in the Palace of Westminster. The Commons is a democratically elected body, consisting of 650 members , who are known as Members...
inquired into the subject (Report of Select Committee on Perpetual Pensions, 248, 1887). An appendix to the Report contains a detailed list of all hereditary pensions, payments and allowances in existence in 1881, with an explanation of the origin in each case and the ground of the original grant; there are also shown the pensions, etc., redeemed from time to time, and the terms upon which the redemption took place. The nature of some of these pensions may be gathered from the following examples:
- To the Duke of MarlboroughJohn Churchill, 1st Duke of MarlboroughJohn Churchill, 1st Duke of Marlborough, Prince of Mindelheim, KG, PC , was an English soldier and statesman whose career spanned the reigns of five monarchs through the late 17th and early 18th centuries...
and his heirs in perpetuity, £4,000 per annum; this annuity was redeemed in August 1884 for a sum of £107,780, by the creation of a ten years annuity of £12,796 17s. per annum. - By an act of 1806 an annuity of £5,000 per annum was conferred on Lord NelsonHoratio Nelson, 1st Viscount NelsonHoratio Nelson, 1st Viscount Nelson, 1st Duke of Bronté, KB was a flag officer famous for his service in the Royal Navy, particularly during the Napoleonic Wars. He was noted for his inspirational leadership and superb grasp of strategy and unconventional tactics, which resulted in a number of...
and his heirs in perpetuity. - In 1793 an annuity of £2,000 was conferred on Lord RodneyGeorge Brydges Rodney, 1st Baron RodneyGeorge Brydges Rodney, 1st Baron Rodney, KB was a British naval officer. He is best known for his commands in the American War of Independence, particularly his victory over the French at the Battle of the Saintes in 1782...
and his heirs.
All these pensions were for services rendered, and although justifiable from that point of view, a preferable policy is pursued in the 20th century, by Parliament voting a lump sum, as in the cases of Lord Kitchener
Herbert Kitchener, 1st Earl Kitchener
Field Marshal Horatio Herbert Kitchener, 1st Earl Kitchener KG, KP, GCB, OM, GCSI, GCMG, GCIE, ADC, PC , was an Irish-born British Field Marshal and proconsul who won fame for his imperial campaigns and later played a central role in the early part of the First World War, although he died halfway...
in 1902 (£50,000) and Lord Cromer
Evelyn Baring, 1st Earl of Cromer
Evelyn Baring, 1st Earl of Cromer, GCB, OM, GCMG, KCSI, CIE, PC, FRS , was a British statesman, diplomat and colonial administrator....
in 1907 (£50,000).
Charles II granted the office of Receiver-General and Controller of the Seals of the Court of Kings Bench and Common Pleas to the Duke of Grafton
Henry FitzRoy, 1st Duke of Grafton
Henry FitzRoy, 1st Duke of Grafton KG was the illegitimate son of King Charles II by Barbara Villiers, Countess of Castlemaine....
. This was purchased in 1825 from the duke for an annuity of £843, which in turn was commuted in 1883 for a sum of £22,714 12s. 8d. To the same duke was given the Office of the Pipe
Pipe Rolls
The Pipe rolls, sometimes called the Great rolls, are a collection of financial records maintained by the English Exchequer, or Treasury. The earliest date from the 12th century, and the series extends, mostly complete, from then until 1833. They form the oldest continuous series of records kept by...
or Remembrancer of First-Fruits and Tenths of the Clergy
Remembrancer
The Remembrancer was originally one of certain subordinate officers of the English Exchequer. The office itself is of great antiquity, the holder having been termed remembrancer, memorator, rememorator, registrar, keeper of the register, despatcher of business...
. This office was sold by the duke in 1765 and, after passing through various hands, was purchased by one R. Harrisor in 1798. In 1835 on the loss of certain fees the holder was compensated by a perpetual pension of £62 9s. 8d. The Duke of Graftol also possessed an annuity of £6,870 in respect of the commutator of the dues of butlerage
Butlerage
A butlerage was a duty of two shillings on every ton of wine imported into England by merchant strangers; so called because it was paid to the king's butler for the king. The tax was first implemented in 1302 and stopped being levied in 1809....
and prisage.
To the Duke of St Albans
Charles Beauclerk, 1st Duke of St Albans
Charles Beauclerk, 1st Duke of St Albans, KG was an illegitimate son of King Charles II of England by his mistress Nell Gwynne.-Life:...
was granted in 1684 the office of Master of the Hawks
Master of the Hawks
The office of Master of the Hawks was created on the English Restoration in 1660. During Charles II's reign, the Master's salary was £390 per annum ; in William III's reign, it was increased to £1500...
. The sum granted by the original patent were: Master of Hawks, salary £391 1s. 5d.; four falconers at £50 per annum each, £200; provision of hawks, £600; provision of pigeons, hens and other meats £182 10s.; total, £1373 11s. 5d. This amount was reduced by office fees and other deductions to £965, at which amount it stood until commuted in 1891 for £18,335.
To the Duke of Richmond
Charles Lennox, 1st Duke of Richmond
Charles Lennox, 1st Duke of Richmond, 1st Duke of Lennox, 1st Duke of Aubigny was the illegitimate son of Charles II of England and his mistress Louise de Kérouaille, Duchess of Portsmouth....
and his heirs was granted in 1676 a duty of one shilling per ton of all coals exported from the Tyne
River Tyne
The River Tyne is a river in North East England in Great Britain. It is formed by the confluence of two rivers: the North Tyne and the South Tyne. These two rivers converge at Warden Rock near Hexham in Northumberland at a place dubbed 'The Meeting of the Waters'.The North Tyne rises on the...
for consumption in England. This was redeemed in 1799 for an annuity of £19,000 (chargeable on the consolidated fund), which was afterwards redeemed for £633,333.
The Duke of Hamilton
Duke of Hamilton
Duke of Hamilton is a title in the Peerage of Scotland, created in 1643. It is the senior dukedom in that Peerage , and as such its holder is the Premier Peer of Scotland, as well as being head of both the House of Hamilton and the House of Douglas...
, as hereditary keeper of the palace of Holyrood House, received a perpetual pension of £45,105 and the descendants of the heritable usher of Scotland drew a salary of £242 10s.
The conclusions of the committee were that pensions allowances and payments should not in future be granted in perpetuity, on the ground that such grants should be limited to the persons actually rendering the service, and that such reward should be defrayed by the generation benefited; that offices with salaries and without duties, or with merely nominal duties, ought to be abolished; that all existing perpetual pensions and payments and all hereditary offices should be abolished: that where no service or merely nominal service is rendered by the holder of an hereditary office or the original grantee of a pension, the pension or payment should in no case continue beyond the life of the present holder and that in all cases the method of commutation ought to ensure a real and substantial saving to the nation (the existing rate, about 27 years purchase, being considered by the committee to be too high). These recommendations of the committee were adopted by the government and outstanding hereditary pensions were gradually commuted, the only ones left outstanding being those to Lord Rodney (£2,000) and to Lord Nelson (£5,000), both chargeable on the Consolidated Fund.
Political pensions
These are type sui generisSui generis
Sui generis is a Latin expression, literally meaning of its own kind/genus or unique in its characteristics. The expression is often used in analytic philosophy to indicate an idea, an entity, or a reality which cannot be included in a wider concept....
as they either reward a career in domestic politics or are awarded in the colonial context not on grounds of justice, contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
or socio-economic merits, but as a political decision, in order to take a politically significant person (often deemed a potential political danger) out of the picture by paying him or her off, regardless of seniority.
Civil List pensions
These are pensions granted by the Sovereign from the Civil ListCivil list
-United Kingdom:In the United Kingdom, the Civil List is the name given to the annual grant that covers some expenses associated with the Sovereign performing their official duties, including those for staff salaries, State Visits, public engagements, ceremonial functions and the upkeep of the...
upon the recommendation of the First Lord of the Treasury
First Lord of the Treasury
The First Lord of the Treasury is the head of the commission exercising the ancient office of Lord High Treasurer in the United Kingdom, and is now always also the Prime Minister...
. They were to be "granted to such persons only as have just claims on the royal beneficence or who by their personal services to the Crown, or by the performance of duties to the public, or by their useful discoveries in science and attainments in literature and the arts, have merited the gracious consideration of their sovereign and the gratitude of their country." As of 1911, a sum of £1,200 was allotted each year from the Civil List, in addition to the pensions already in force. From a Return issued in 1908, the total of Civil List pensions payable in that year amounted to £24,665.
Judicial, municipal, etc.
There are certain offices of the executive whose pensions are regulated by particular acts of Parliament. Judges of the High CourtHigh Court of Justice
The High Court of Justice is, together with the Court of Appeal and the Crown Court, one of the Senior Courts of England and Wales...
, on completing fifteen years services or becoming permanently incapacitated for duty, whatever their length of service, may be granted a pension equal to two-thirds of their salary (Supreme Court of Judicature Act 1873
Supreme Court of Judicature Act 1873
The Supreme Court of Judicature Act 1873 was an Act of Parliament by the Parliament of the United Kingdom in 1873...
). The Lord Chancellor
Lord Chancellor
The Lord High Chancellor of Great Britain, or Lord Chancellor, is a senior and important functionary in the government of the United Kingdom. He is the second highest ranking of the Great Officers of State, ranking only after the Lord High Steward. The Lord Chancellor is appointed by the Sovereign...
of Great Britain however short a time he may have held office, receives a pension of £45,000, but he usually continues to sit as a Law Lord in the House of Lords; so also does the Lord Chancellor of Northern Ireland, who receives a pension of £3,692 6s. A considerable number of local authorities have obtained special parliamentary powers for the purpose of superannuating their officials and workmen who have reached the age of 65. Poor law officers receive superannuation allowances under the Poor Law Officers Superannuation Act 1864–1897.
Ecclesiastical pensions
Bishops, deans, canons or incumbent who are incapacitated by age or infirmity from the discharge of their ecclesiastical duties may receive pensions which are a charged upon the revenues of the see or cure vacated.Royal Navy
Navy pensions were first instituted by William III of EnglandWilliam III of England
William III & II was a sovereign Prince of Orange of the House of Orange-Nassau by birth. From 1672 he governed as Stadtholder William III of Orange over Holland, Zeeland, Utrecht, Guelders, and Overijssel of the Dutch Republic. From 1689 he reigned as William III over England and Ireland...
in 1693 and regularly established by an order in council of Queen Anne in 1700. Since then the rate of pensions has undergone various modification and alterations; the full regulations concerning pensions to all ranks will be found in the quarterly Navy List, published by authority of the Admiralty. In addition to the ordinary pension there are also good-service pensions, Greenwich Hospital pension and pensions for wounds.
An officer is entitled to a pension when he is retired at the age of 45, or if he retires between the ages c 40 and 45 at his own request, otherwise he receives only half pay. The amount of his pension depends upon his rank, length of service and age. As an example, in past, the maximum retired pay of an admiral was £850 per annum, for which 30 years service or its equivalent in half-pay time is necessary; he may, in addition, have held a good service pension of 300 per annum. The maximum retired pay of a vice-admiral with 29 years service was £725; of rear-admirals with 27 years service, £600 per annum. Pensions of captains who retire at the age of 55, commanders, who retire at 50, and lieutenants who retire at 45, ranged from £200 per annum for 17 years service to £525 for 24 years service. The pensions of other officers were calculated in the same way, according to age and length of service.
The good-service pensions consisted of ten pensions of £300 per annum for flag-officers, two of which may be held by vice-admirals and two by rear-admirals; twelve of £150 for captains; two of £200 a year and two of £150 a year for engineer officers; three of 100 a year for medical officers of the navy; six of £200 a year for general officers of the Royal Marines and two of £150 a year for colonels and lieutenant-colonels of the same. Greenwich Hospital pensions range from £150 a year for flag officers to £25 a year for warrant officers. All seamen and marines who have completed twenty-two years service are entitled to pensions ranging from 1d. a day to a maximum of 1s. 2d. a day, according to the number of good-conduct badges, together with the good-conduct medal, possessed. Petty officers, in addition to the rates of pension allowed them as seamen, are allowed for each years service in the capacity of superior petty officer, 15s. 2d. a year, and in the capacity of inferior petty officer 7s. 7d. a year.
Men who are discharged from the service on account of injuries and wounds or disability attributable to the service are pensioned with sums varying from 6d. a day to 2s. a day. Pensions are also given to the widows of officers in certain circumstances and compassionate allowances made to the children of officers. In the Navy estimates for 1908–1909 the amount required for halfpay and retired-pay was £868,800, and for pensions, gratuities and compassionate allowances £1,334,600, a total of £2,203,400.
Army
The system of pensions in the British Army is somewhat intricate, provision being made for dealing with almost every case separately.Pension provision by age group
The Family resources survey from the UK Department for Work and PensionsDepartment for Work and Pensions
The Department for Work and Pensions is the largest government department in the United Kingdom, created on June 8, 2001 from the merger of the employment part of the Department for Education and Employment and the Department of Social Security and headed by the Secretary of State for Work and...
, details levels of income, saving and pension provision for a representative selection of UK households and is the source for the table below for UK employees (Table 7.12):
| Pension Provision Level | 16–24 age group | 25–34 age group | 35–44 age group | 45–54 age group | 55–59 age group | 60–64 age group | 65 + age group | Working age Male | Working age Female | All Adult Employees | All Self Employed Adults |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Occupational Pension | 15% | 41% | 51% | 52% | 49% | 33% | 2% | 44% | 46% | 42% | 1% |
| Personal or Stakeholder Pension | 1% | 8% | 11% | 11% | 11% | 8% | 3% | 12% | 7% | 9% | 30% |
| Both Occupational and Personal Pension | 0 | 1% | 2% | 3% | 3% | 2% | 0 | 2% | 2% | 2% | 0 |
| Not in any Pension scheme | 83% | 49% | 36% | 34% | 37% | 56% | 95% | 42% | 46% | 47% | 68% |
Most employees over the state pension age of 65 would not have pension provision as part of their salary and benefits - they may well however be receiving income from a pension from previous employment
See also
- German pensions
- US pensions
- Aging of EuropeAging of EuropeThe Ageing of Europe, also known as the greying of Europe, is a demographic phenomenon in Europe characterized by a decrease in fertility, a decrease in mortality rate, and a higher life expectancy among Europeans.-Overall trends:...
- Pension simplificationPension simplificationPension tax simplification, often simply referred to as "pension simplification" and taking effect from A-day in 6 April 2006 was a policy announced in 2004 by the Labour government to rationalise the British tax system as applied to pension schemes...
- Minimum funding requirementMinimum funding requirementThe Minimum Funding Requirement was a part of United Kingdom legislation in the Pensions Act 1995, and was introduced on 6 April 1997. The Pensions Act 2004 abolishes the MFR replaces it with new "statutory funding objective"; this came into force on 30 December 2005 for all pension schemes with...
- Frozen pensionFrozen pension-Frozen occupational pension:Pensions which have been left behind in an occupational pension scheme by people who are no longer employed by the sponsoring employer are "frozen" until retirement age...
State pensions Acts
- Widows ‘Orphans’ and Old Age Contributory Pensions Act 1925
- National Insurance Act 1946National Insurance Act 1946The National Insurance Act 1946 was a British Act of Parliament which established a comprehensive system of social security throughout the United Kingdom...
- National Insurance Act 1965
- Social Security Contributions and Benefits Act 1992Social Security Contributions and Benefits Act 1992The Social Security Contributions and Benefits Act 1992 is the primary legislation concerning the state retirement provision, accident insurance, statutory sick pay and maternity pay in the United Kingdom.-Contents:*Part I Contributions...
(c 4)
Private pensions Acts
- Superannuation and other Funds (Validation) Act 1992
- Pension Schemes Act 1993Pension Schemes Act 1993The Pension Schemes Act 1993 is a United Kingdom Act of Parliament that concerns the administration of occupational pensions.-Background:...
- Pensions Act 1995Pensions Act 1995The Pensions Act 1995 is a piece of United Kingdom legislation to improve the running of pension schemes.-Background:Following the death of Robert Maxwell it became clear that he had embezzled a large amount of money from the pension fund of Mirror Group Newspapers...
- Pensions Act 2004Pensions Act 2004The Pensions Act 2004 is an Act of the Parliament of the United Kingdom to improve the running of pension schemes.-Background:In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing to offer the protection to pension scheme members that had...
- Pensions Act 2007Pensions Act 2007The Pensions Act 2007 is an Act of the Parliament of the United Kingdom. It incorporated the main findings of the all-party Pensions Commission in 2006 as set out in the white paper Security in retirement: towards a new pension system published in May 2006.The key provisions were:#Reduction of the...
- Pensions Act 2008Pensions Act 2008The Pensions Act 2008 is an Act of the Parliament of the United Kingdom. The principal change brought about by the Act is that all workers will have to opt out of an occupational pension plan of their employer, rather than opt in...
External links
- Association of Member-Directed Pension Schemes (AMPS) - The principal body for discussing changes involved in the area of pension planning.
- Pensions and retirement planning (Directgov)
- http://www.dwp.gov.uk/pensionsreform/pdfs/PensionsBillImpactAssessmentDec07.pdf The impact assessment released in December 2007 for the pension bill 2008. It provides a complete appraisal of the reforms. There are also factsheets on individuals and employer reactions which have implications for the UK pension industry.]
- UK Pension Calculator