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Types of Pensions

There are lots of different types of pension schemes with the most common types being:
  • occupational pensions - also known as company pensions
  • personal pensions
  • stakeholder pensions

 

Occupational pension schemes

These schemes are also called company pension schemes. This is a scheme set up by an employer to provide a pension in retirement and/or death benefits for its employees. An occupational pension can provide pension benefits on a money purchase, defined benefits, cash balance or hybrid arrangement basis. The two most common arrangements for occupational schemes are:

  • defined benefit
  • money purchase

 

If you leave your employment, you'll normally have to stop building up pension benefits in your employer's scheme.

 

Personal Pension schemes

A personal pension scheme is set up and run by a financial organisation such as a bank or insurance company. You can pay regular or one-off lump sum contributions to the scheme, who will invest the contribution on your behalf.

Most people can start paying into a personal pension scheme - you don't have to be in employment. If you're an employee, your employer may also pay into your personal pension scheme.

Your personal pension scheme provider should send you a statement each year telling you how much your pension fund is worth.

 

Stakeholder Pension

Stakeholder pensions are similar to a Personal Pension. The only difference is they have to meet a number of standards which include:

  • A maximum annual management charge of 1.5% for the first 10 years, after which the annual management charge reduces to 1.0%*.
  • Contributions can be as low as £20pm
  • You can stop, start and change your contributions whenever you like

*Note for all Stakeholder pensions taken out prior to 06 April 2005, the annual management charge is 1% throughout.

 

There are other types of pension scheme that come under the occupational or personal pensions umbrella and the most common are:

  • National Employment Savings Trust (NEST)
  • group personal pension (GPP)
  • self invested personal pension (SIPP)
  • buy out policy - also known as deferred annuity contract or section 32 policy
  • small self administered schemes - SSAS

For further information on pensions please contact using the 'request a call back' tab above or give us a call.

 

Annuities explained, the guaranteed annuity

A conventional annuity is a contract whereby the insurance company agrees to pay to the investor a guaranteed income either for a specific period or for the rest of his or her life in return for a capital sum. With a guaranteed annuity, income is paid for the annuitant's life, but in the event of early death within a guaranteed period, the income is paid for the balance of the guaranteed annuity period to the beneficiaries. 

 

Annuity key points
Income paid is based on the investor's age, i.e. the mortality factor and interest rates on long term gilts.
Income is paid annually, half yearly, quarterly or monthly.

Annuities can be on one life or two. If they are on two lives the annuity will normally continue until the death of the second life.

If the annuitant dies early, some or all, of the capital is lost. Capital protected annuities return the balance of the capital on early death.

Payments from pension annuities are taxed as income.
Purchased life annuities have a capital and interest element - the capital element is tax free, the interest element is taxable.

 

Types of annuity
Types of annuity include the following - Immediate; guaranteed; compulsory purchase; open market option; deferred; temporary; level; increasing or escalating.


Open Market Option

Also known as open market option annuities, these are bought with the proceeds of pension funds. A fund from an occupational scheme or buy-out (S32) policy will buy a compulsory purchase annuity. A fund from a retirement annuity or personal pension will buy an option market option annuity - an opportunity to move the fund to a provider offering better annuity rates.

All clients considering an annuity speak to their adviser as the OMO could produce a higher income in retirement.

 

Immediate annuity
The purchase price is paid to the insurance company and the income starts immediately and is paid for the lifetime of the annuitant.

 

Guaranteed annuity
Income is paid for the annuitant's life, but in the event of early death within a guaranteed period, say five or 10 years, the income is paid for the balance of the guaranteed period to the beneficiaries.

 

Deferred annuities
A single payment or regular payments are made to an insurance company, but payment of the income does not start for some months or years. This may be suitable for an investor funding for retirement or school fees.

 

Annuity certain/deferred annuity certain
Often used for school fees purposes. The annuity is paid for a fixed period either immediately or after a deferred period, irrespective of the survival of the original annuitant.

 

Temporary annuity
A lump sum payment is made to the insurance company, and income starts immediately, but it is only for a limited period - say five years. Payments finish at the end of the fixed period or on earlier death.

 

Level annuity
The income is level at all times. This of course does not keep pace with inflation.

 

Although the starting income will be higher than the equivalent pension with escalation (increasing income) the income will not keep pace with the cost of living over time.


Increasing or escalating annuity
The annuitant selects a rate of increase and the income will rise each year by the chosen percentage. Some life offices now offer an annuity where the performance is linked to some extent to either a unit linked or with profits fund to give exposure to equities and hopefully increase returns.

The starting income will be less than the equivalent level annuity.

 

Pensions are a long term investment. The capital invested can go down as well as up. You may not get back the full capital invested. Pensions can be subject to legislative changes now and in the future which can affect what can be saved and the taxation of pensions both on investment and taking the income in retirement.

It is always important to seek independent financial advice both for building up a suitable retirement income and accessing that income in the most suitable way for your circumstances in retirement.