Pension Schemes

What is a defined-contribution money-purchase scheme?

Defined-contribution schemes are as the name suggests. It's certain amounts of money that gets put into this scheme when you're working, that will then be invested and hopefully grow in value, which then gets converted to an income when you retire.

What is a defined-benefit final salary scheme?

Final salary schemes are great news if you can get hold of one. The reason being that wherein defined benefits the risk is on your shoulders. The money has to be invested and you could lose money. With final salary it is on the employer's shoulders. They have to provide a pension for your retirement; usually based on how many years you've worked for them. So they're a great value, you're opt to get a very, very attractive pension if you work in one of those. But because they cost employers lots of money most of them now are shunning away from that and there becoming rarer and rarer so if you have one they're like gold dust.

What is an unsecured pension?

An unsecured pension is when you start working but you don't actually convert your pension to an income at that stage. Instead of buying what is called an annuity, which is the way you'd normally convert your pension to an income, you can instead, dip your hands into the pension and draw a certain amount of income each year. You can do this between the ages of 50 to 75. Generally though, in that time up until you convert it to an annuity, it's called an unsecured pension.

How does a lifetime annuity work?

Having saved into a pension over your working life, you end up hopefully with a nice big pot of money. The challenge is to convert that to an income for the rest of your life while you are in retirement. The simplest and most common way to do that is to use what is called a lifetime annuity, and that basically means that you give the pension company your pot of money and they in turn give you a promise that they pay you a certain amount of income for the rest of your life.

How does short-term annuity work?

Whereas most annuities are generally paid for life, a short-term annuity will often be for, say, only five or ten years. What that means is that you get a higher income than you would with a conventional annuity, because it's only being paid for a short period of time. Where it tends to be used is, more often, you'll use your entire pension pot to put everything into a lifetime annuity. You might use part of it to buy a short-term annuity. You'll get a higher income on that because of the short-term nature. It can be a way of pension planning, and we'll time it to ensure a fairly high, consistent income.

Should I join my employer's pension scheme?

Many employers actually contribute into the scheme on your behalf, without putting in any yourself or maybe matching your own contribution. And that's really something for nothing, so it's well worth looking at. In most cases it's well worth joining. Some employers unfortunately aren't so generous. If not putting anything themselves, then you have to take a look at that pension and see whether it is a good one compared to other ones on the market. If not, maybe then choose another because the employers are not doing anything on their behalf. Therefore, choose whatever is best for you.