There are a number of different types of pension arrangements but they broadly fall into two categories: defined benefit, also known as final salary, and defined contribution, also known as money purchase.
Defined Contribution Pensions
A defined contribution (or money purchase) scheme is the most common type of pension. This involves you making regular payments to build up a pot of money, which grows over time through compound interest. Your payments into the pension pot are enhanced by tax relief at your highest rate of income tax. If the scheme is a workplace pension, you may also receive contributions into the pot from your employer. You can also set up a private pension such as a stakeholder pension.
Final Salary Pensions
A defined benefit (or final salary) pension scheme is only available as a workplace pension, not as a private pension. Such a scheme will pay you a regular guaranteed income in retirement, much like an annuity. The size of the payments will depend on a variety of factors, including the size of your earnings when leaving that employer and how long you were a member of the scheme. Defined benefit schemes are generally highly sought-after, but most employers are phasing them out.
Ask a financial adviser to tell you more about the different type of private pensions and workplace pensions. of pension arrangements available and the schemes being offered to your by your employer. Some financial advisers will offer you a free pension check so you can assess your current arrangements at no obligation.
Questions to ask a financial adviser:
- How much do I need to save?
- What will I get from my company pension?
- How could I improve my retirement income?
- What are the annual charges on the private pension scheme you are recommending?