Who is protecting your future – part 2
What sort of pension is right for you?
In a series of articles, we will try to explain your options and clear some of the minefields for you.
We are not pension advisors – we are accountants. We do not sell pensions and have no vested interest, other than helping our clients protect themselves financially.
Last week we gave a brief introduction for the uninitiated. This week we are looking at more of the basics and will cover the different types of schemes available.
It is also important to point out in the current climate that the term “scheme” in this context does not imply anything dodgy. Pensions should be a tax effective way of saving for later in life, but they are not in any way avoiding tax, or worse. Of course, Governments are keen to encourage you to save for your future to reduce the burden on the State.
In this article, we will look at
Defined contribution pensions
Defined benefit pensions
Auto-enrolment
All pension schemes are different and the way they work depends on the scheme rules. A pensions advisor, normally a qualified IFA (Independent financial adviser), should be able to advise you further.
Where we refer below to employer schemes, remember that if you are running your own business it is up to you to arrange this.
Defined contribution pensions
If you have a defined contribution scheme, which also includes what is known as a money purchase scheme, what you get when you retire is not specified in advance. Instead, you build up your own pot of money. You (and your employer if it’s a workplace pension scheme) pay into your pension normally on a monthly basis and this money is invested. So the final value of your pot and therefore pension will depend on the amount paid in, the charges and the performance of the investments.
Defined contribution pension schemes invest the contributions, made by you and/or your employer, in a range of different investments. You may be offered a choice about how your contributions are invested.
The benefits that you receive at retirement depend on:
- how much has been paid in on your behalf (by you and/ or your employer)
- the length of time that it has been invested
- how the investments have performed over this period
There are varieties of money purchase schemes which there is not space to deal with in this article.
Defined benefit pensions
If you have a defined benefit scheme, you will get a specified income when you reach the scheme’s retirement age. This income is normally worked out using a formula that takes into account your salary and length of service. You may have to pay contributions to the scheme but usually, your employer will also pay contributions on your behalf. This will vary from scheme to scheme.
Examples of defined benefit pension schemes include final salary schemes and career average revalued earnings schemes.
This type of scheme is prevalent amongst those that have been in the news for some time now and heavily criticised where they have been underfunded.
Auto-enrolment
Firstly, if you are an owner managed business and the only director then there is an exemption from auto-enrolment.
Automatic enrolment is a Government initiative that obliges all employers to enroll eligible employees into a workplace pension, provided they are not already in one. It was introduced to protect workers who missed out or didn’t join pension schemes. It makes it compulsory for employers to automatically enroll their eligible workers into a pension scheme. Employers also have to pay a minimum contribution into the pension scheme for their eligible workers.
Auto-enrolment has been phased in, starting with the largest UK employers. If you are an eligible employee (see below) you should have been enrolled by now. If you are an employer and have staff that are eligible then you should have acted by now to set up a scheme.
You are eligible for auto-enrolment if you:
- Are at least 22 years old
- Have not reached State Pension age
- Earn more than a minimum amount a year (currently £10,000) and
- Work, or ordinarily work, in the UK (under a contract)
So those are some of your options in very general terms. Going forward we will look at how different generic pension arrangements work and what is best for SME’s and self-employed
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
Related Blog
Who is protecting your future – part 1
Introduction to pensions Although there are different types of pension schemes available, they all have the same aim – to help you save money and provide you with an income when you’re older. In a series of articles, we will try and explain your options and clear some of the minefields for you. We are — Read more
