These are large public-sector state-run pension schemes for people employed by the NHS, civil service, teachers and military. They provide you with a guaranteed income at retirement and are often referred to as pay-as-you-go schemes. If you’re a member, your retirement benefits are paid from the contributions you and all the members have paid, as well as from the government using money raised from income tax.
Unfunded pensions deliver a guaranteed income and tax-free cash amount when you reach retirement age. You have no concerns about investing your money, wondering how it’s doing or what you might get back later in life. In effect, you are building up a pension with a ‘promise to pay’ that the scheme will provide when you retire.
The amount of retirement benefits you build up over time varies across the different schemes. It often depends on the year you started work with your employer. The common factor across all the schemes is that in exchange for your membership, each year a credit is given to you in the form of a fraction e.g. 1/80th or 1/60th. The annual statement you receive from your scheme will tell you how much retirement income you have built up. In all cases, a tax-free cash amount is also available to you. Helpfully, your statement shows an estimate of the pension you might receive. And, that’s about as certain as you can get in the pensions world!
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