Types of UK Pension | Services | Alexander Peter Wealth Management

Employers pensions

There are two different types of workplace pension schemes offered by employers:

Final Salary Pensions (or Defined Benefits Schemes)

These are often called the Rolls Royce of pension schemes because they provide a guaranteed income for the rest of your life based on a combination of your salary and the length of time that you we're in the pension scheme.

The advantages is that your income in retirement is to all intents and purposes guaranteed by the company as they carry all of the investment risk to provide you with the pension. Once you start to receive your pension it will increase each year. In the event of your death a spouse or partners pension would be payable equal to 50% of the pension you were receiving, which will go up in payment and continue until the death of your spouse or partner. In the majority of cases there is also a dependents pension for children who are still in full time education which normally finishes at age 18 but in certain circumstances can continue until your children are aged 23.

The disadvantages is that the payment is fixed and structured in such a way that you are unable to alter it. The benefits will be paid in Sterling which mean if you are no longer a UK resident you will carry the currency risk depending on where you now live. The cost of these schemes is very high which is why the majority of companies have closed their schemes to new members. The company are required to make payments to ensure that there is sufficient funds in the scheme to meet its liabilities. Unfortunately, an increasing number of schemes are not fully funded and a growing number have large deficits.

Defined contributions schemes

There are a number of different variations on this type of scheme but they are all based on contributions that you and your employer make to the scheme. The pension you receive will depend on three variables:

The amount of the contributions
The investment performance
The length of time the funds have been invested

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Personal arrangements

These are for individuals who are self-employed or whose employer didn't previously provide a pension scheme, prior to October 2012 when all employers were required to provide their employees with a pension arrangement.

Types of personal arrangements:

Personal Pensions

This Is the most common type of arrangement since its introduction in 1988. They are always defined contribution schemes, in that the pension you receive depends on a combination of the contributions, the made the investment performance and the length of time over which the funds were invested.

At retirement the majority of these schemes will provide a Tax free cash sum, known as the PCLS (Pension Commencement Lump Sum) plus an annuity. A number of schemes will now offer flexible drawdown; introduced in 2015.

Retirement annuity contract (RAC)

This was an older style personal pension and works on the same basis although the structure of the benefits at retirement it's slightly different these have not been available since 1988.

Stakeholder Pensions

These were introduced by the government in 2001. They had to meet minimum standards set down by the government in terms of low charges and flexibility.

SIPP (Self-invested personal pension)

A style of personal pension that allows greater flexibility in terms of the investment options which would include, single company shares, commercial property or more specialised investments for those with the technical knowledge. These investments could include fine wines, vintage cars, works of art, but could not include residential property. These schemes are of particular interest to expats as they permit cash and investments to be held in a range of major currencies such as EUR and USD