Pension Schemes – What they are, types and arrangements

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

Pension Arrangements

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

schemes.

[Stay tuned for more posts on pensions, the new changes and tax treatments.]