Employers Schemes
If you have the opportunity to join an employer's pension scheme, you should take it. The best type of employer-run pension is a final-salary scheme - also referred to as a defined-benefit scheme. With this type of scheme, your pension contributions buy you a pension that is guaranteed to be a definite proportion - up to a maximum of two-thirds - of your salary at retirement or at the end of the scheme, whichever is earlier. What you pay in is not directly linked to what you get out, because the onus is on your employer to make sure that you are paid the pension you have been promised.
This is not the case with an employer's money-purchase scheme (a type of defined contribution scheme), which an increasing number of employers are offering in preference to a salary-related scheme. With a money-purchase scheme, your pension contributions (and the contributions your employer puts in on your behalf) are invested, typically in stocks and shares, to build up a fund. This fund of investments carries on growing until you decide to take your pension. At that point, the fund is converted into cash, the bulk of which is used to buy an annuity - a type of investment which pays a fixed sum to you at regular intervals for the rest of your life.
Some employers offer hybrid schemes - also called mixed-benefit schemes - which are a combination of the two types. The pension you get at retirement is guaranteed to be the greater of whichever method of calculating your pension gives the better result.
Whichever kind of scheme your employer offers - and you are unlikely to be given a choice - joining it makes sound financial sense. Because your employer meets the costs of running the scheme and contributes on your behalf, an employer's scheme will provide a bigger pension for the same money than either your own stakeholder or personal pension. It is worth noting that the main cause of the pensions' mis-selling scandal of the late 1980s was people being wrongly advised to give up the benefits of an employer's scheme to take out a personal pension.
Stakeholder Pensions
A stakeholder pension is a type of personal pension and - like other defined contribution schemes - it works on a money purchase basis.
Stakeholders have been available since April 2001. They are aimed at people who do not have an employer's scheme to join. This includes the self-employed and people who do not have a job.
Since October 2001, employers with more than five employees have had to provide access to a workplace stakeholder pension if there isn't already a different sort of pension on offer.
The most important difference between stakeholder pensions and the earlier type of personal pension - which got a justifiably bad name for being expensive and inflexible - is that the government has laid down minimum standards that stakeholders must meet. Old-style personal pensions don't have to meet these minimum standards.
When you invest in a stakeholder pension, you can be sure that the company you buy it from will:
- charge no more than 1% of the value of your fund each year in fund management charges
- let you pay in as little as £20 at a time
- allow you to make both one-off and regular contributions whenever you choose
- not make you pay extra charges if you stop paying in or decide to transfer your fund to a different company.
If you don't currently pay into a pension, you should consider a stakeholder. It is also an option worth considering if you are already paying into either an employer's scheme or a pre-April 2001 personal pension and you want to increase your pension savings.
