INTRODUCTION TO PENSIONS

Pension schemes fall into several broad categories, and you may have more than one type.
Here is a summary of the most common types of pension schemes:

…retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay. A defined benefit plan is ‘defined’ in the sense that the benefit formula is defined and known in advance. Conversely, for a “defined contribution retirement saving plan”, the formula for computing the employer’s and employee’s contributions is defined and known in advance, but the benefit to be paid out is not known in advance.

The most common type of formula used is based on the employee’s terminal earnings (final salary). Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker’s career.

In the private sector, defined benefit plans are often funded exclusively by employer contributions. For very small companies with one owner and a handful of younger employees, the business owner generally receives a high percentage of the benefits. In the public sector, defined benefit plans usually require employee contributions.

Over time, these plans may face deficits or surpluses between the money currently in their plans and the total amount of their pension obligations. Contributions may be made by the employee, the employer, or both. In many defined benefit plans the employer bears the investment risk and can benefit from surpluses.

Many schemes continue to run large deficits, potentially unable to meet future obligations. If you have a defined benefit / final salary scheme, and are concerned about any deficit, then in certain circumstances transferring to a new pension arrangement could be appropriate. Many Avantis Wealth Clients begin their investment journey through a complimentary pension review, and is a key benefit of membership to the Astute Investor Club. For details of the club and how to join click here.

…benefits are based on the amounts credited to these accounts (through employee contributions and, if applicable, employer contributions) plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.

While Defined Contribution plans are sometimes referred to as pensions, they are not. The word “pension” is defined as “a fixed amount, other than wages, paid at regular intervals to a person or to the person’s surviving dependents in consideration of past services”. In contrast, a Defined Contribution retirement plan is an arrangement where an employer, during the time a person is employed, puts money in a registered retirement account on the employee’s behalf. In general, a defined contribution plan provides much less security for the employee, and much less obligation for the employer, than a defined benefit pension plan. Consequently, over time, many employers, especially in the private sector, have discontinued offering defined benefit plans to their employees and have switched to offering them defined contribution plans instead. Many Avantis Wealth Clients begin their investment journey through a complimentary pension review, and is a key benefit of membership to the Astute Investor Club. For details of the club and how to join click here.

…from the full range of investments approved by HM Revenue and Customs (HMRC).

SIPPs are a type of Personal Pension Plan. Another subset of this type of pension is the Stakeholder Pension Plan. SIPPs, in common with personal pension schemes, are tax “wrappers”, allowing tax rebates on contributions in exchange for limits on accessibility. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably equities and property. Rules for contributions, benefit withdrawal etc. are the same as for other personal pension schemes.

A select number of SIPP providers accept F.R.E.S.H. investments from Avantis Wealth. For more information, please contact our investment broker team on 01273 447299 or email invest@avantiswealth.com.

…employees of the company. They offer greater flexibility in the types of investments that can be held.

F.R.E.S.H. investments from Avantis Wealth, can be held in SSAS. For more information, please contact our investment broker team on 01273 447299 or email invest@avantiswealth.com.