Comparing Pension Products: A User Guide

Contributing towards a pension is an important investment many Brits fail to consider early enough.   

There are generally three different types of pensions available, alongside the state pension which is not enough to live off alone. 

Defined Benefit

This pension is slowly being phased out as it costs the employer too much to sustain.  Public sector workers are typically eligible for a defined benefit pension.

They are usually required to pay a percentage of their salary towards the pension each month; however the responsibility of the pension lies with the employer.

A defined benefit is either based on the final salary of the worker on retirement, or an average salary of the period where the worker was employed by this particular employer.

Defined Contribution

A defined contribution is probably now the most common type of pension, where a percentage of an employeeís salary is put into a savings pot by the employer and the employee over their working lifetime.

When the worker comes to retire, this pot of money is then used to buy an annuity depending on the amount they have saved.  This annuity will provide a pension for the worker, so the more the person saves, the bigger the pension.  The final salary or the average salary of the worker has no impact over the size of the pension they are likely to receive.

Personal Pensions

These are sometimes termed stakeholder pensions too, and are suitable for those who may or may not be employed but do not have access to a pension scheme in their place of work, but are able to put aside some money themselves.

If you have a personal pension you can put in as little as you like on a regular basis, however, if you are offered a defined contribution scheme from your employer it would make more sense to take this instead as your employer will also be contributing to your pension.

In addition to contributing to a pension scheme, or instead of, some people prefer to invest their money into stocks and shares through an equity ISA.  For those with a good income, this extra investment will prove to be useful on top of their pension.

 

Leave a Reply

Your email address will not be published. Required fields are marked *