What are Pension Schemes?
A pension scheme is the method of saving towards your retirement in order to
generate an income when you get to retirement age.
There are two saving options open to you – a company pension that an
employer might set up and contribute towards AND a personal pension scheme.
You can have one or both if you want.
From October 2012, employers must start enrolling their employees into a
pension scheme and pay contributions for them.
Anyone, including those over retirement age – whether employed, self-employed
or unemployed – can join a personal pension scheme. They are set up and run
by insurance companies and financial organisations.
Types of Pension Schemes
There are different types of pension schemes, some simple, others complex hybrids. The commonest types are:
– company pensions also known as occupational pensions
– personal pensions
– stakeholder pensions
Each type of scheme has a variety of pension arrangements for its members.
Your pension arrangement dictates the level of contributions and the draw-down – how you take your pension.
The arrangement also affects how your contributions are taxed.
The two commonest types of pension arrangements are:
– Money purchase also known as Defined contribution: Your pension pot relies
on your contributions. What you get will however depend on how the post is
invested and what the pot can buy. The stakeholder pension scheme is a type
of defined contribution arrangement.
– Defined benefits: There is no link between your contributions and your
pension payments. What you will get is usually pre-determined based on your
pay and length of years in service. Normally associated with company pension
[Stay tuned for more posts on pensions, the new changes and tax treatments.]