This section features informational guides on different aspects of the pension arena.
We have put together a pretty comprehensive pension glossary to help you to understand all the jargon that is involved in the industry.
A pension is a steady income, usually given after retirement, and typically made up of a guaranteed annuity. Retirement planning, normally has a design whereby a cash balance is accumulated through various mechanisms, with this cash balance paid out on retirement. Pensions that derive from an employer and benefits the employee are commonly referred to as occupational or employer pensions. Labour unions, the governments, or other organisations may also fund pensions.
There are four main types of pension, which are very briefly described below. For more details delve further into the site.
With a defined contribution pension scheme – be it a personal pension or an occupational pension – when the time comes for you to finally retire, the money accumulated in your pension pot (less any tax-free lump sum) will be used to buy an annuity. This is an insurance policy which will provide you with regular income in retirement for the rest of your life. The payments would usually be monthly, but can be quarterly, half-yearly or even annually.
There are many reasons why you may want to consider a pension transfer. For example, if your current pension scheme is being wound up and you need to transfer you pension pot in to another scheme. Equally, you may want to consolidate your pension savings in one scheme offering low administration fees. Or, you may want to have all you pension savings benefitting from your employer’s contributions. You may also be concerned about the investment performance of your pension fund or worried about the future of the pension scheme and so want to transfer your pension pot.
Salary sacrifice is an arrangement whereby an employee agrees to reduce their salary from the terms agreed in their employment contract in exchange for a benefit in kind. As an employee you sacrifice some of your salary, and your employer uses that bit of your salary to provide tax efficient employee benefits. Common uses of salary sacrifice are pension contributions, childcare vouchers and bike loans.
The money you (and/or your employer) put towards your retirement in a pensions scheme is called a pension contribution. Depending on the type of pension scheme, you may be able to contribute regular and/or lump sum payments.
A self-invested personal pension plan (or SIPP) is a flexible type of personal pension. Unlike a personal pension where the fund managers oversee and control investments, a SIPP allows its member much greater flexibility regarding where and how their pension pot is invested.
A SIPP can be a good option for individuals who have the knowledge, confidence and time to manage the investments in their pension fund.
A personal pension is a way to save for retirement, using the income it provides to supplement the basic State pension. It’s ideal for people who cannot join an occupational pension scheme, such as the self-employed.
Sometimes a small employer wants to offer pension provision for their staff, but their size does not warrant a large defined contribution scheme. In these cases a group personal pension (GPP) is often used.
Defined contribution (DC) schemes can be either a personal plan or an occupational pension scheme. These days, most occupational pension schemes are defined contributions schemes – especially in the private sector.
Often referred to as a “gold plated pension”, final salary schemes are a great way to save for retirement. Unfortunately final salary schemes are expensive to sponsor and many employers find they can no longer afford them, so they are a dyeing breed these days.
This type of pension provision is popular with employers as they can control the cost of their pension provision. Unlike a final salary scheme where the employer must make sure that the scheme can meet its members’ pension benefit obligations, with an occupational DC scheme it is up to the employee to make enough contributions to provide for their retirement.
The Government is introducing number of key changes to the pension landscape from 2012. These include the introduction of a new trust-based pension scheme – the National Employment Savings Trust (NEST) and pension scheme auto-enrolment for employees.
The Pension Protection Fund (PPF) was established in 2005 by the Government and acts as a lifeboat fund for occupational defined benefit pension schemes, such as final salary schemes. It offers some protection of pension benefits to members of eligible salary-based schemes, should a sponsoring employer go bankrupt and leave the pension scheme with insufficient funds to cover its obligations to its members.
As part of its attempts to deal with the looming pension crisis in the UK and the failure of people to make provision for their retirement, the Governments has introduced legislation that requires all employers to auto-enrol their staff in a qualifying workplace pension scheme. The requirement is due to start in October 2012.
To encourage people to save for their retirement the Government gives people tax relief on their pension contributions. These tax breaks are the main reason why it makes sense to save for retirement via a pension plan.
There are two parts to the State pension: the basic State pension and an additional pension, or State Second pension (S2P). The additional pension acts as a top-up to the basic State pension, for employees boosting their income in retirement. The S2P reflects an employee’s earnings throughout their working life.
A money purchase type of pension is used by the employed and the self-employed. Money purchase pension are the most common type of pension in the UK and include occupations defined contribution schemes, personal pensions and even Section 32 buyouts.
If you have a personal pension or a stakeholder pension and don’t want to purchase an annuity, one option open to you is an income drawdown arrangement or unsecured pension with an insurance company. Income drawdown allows you to continue to keep your pension pot invested and take an income each year from your pension fund instead of buying an annuity.
If you have a money purchase pension, be it a personal pension or a company pension, when you finally decide to retire you will need to use what is left of your accumulated pension fund to by a lifetime annuity.
Those with a pension fund from a money purchase scheme, be it a personal pension or an occupations defined contribution scheme, will need to use their accumulated personal fund to buy an annuity. But you cannot change an annuity once you have purchased it, so it is vital that you make the right decision for your circumstances.