Pensions

Experts advise that any long-term investment portfolio should feature a range of investments at various levels of risk. A multifaceted portfolio increases the chances of earning good returns whilst reducing the risk to your capital should the stock market falter. A pension scheme should be part of everyone's portfolio. There is no limit on the amount that you are allowed to save for your retirement, so you may wish to pay into more than one scheme. The schemes in which you choose to invest will also differ in terms of the risk they entail.

Essentially there are two basic types of pension scheme: defined benefit schemes and defined contribution schemes. A defined benefit scheme will pay you a guaranteed annual income, or benefit, on retirement. If you meet the terms of membership, this benefit will be paid: its value is not influenced by the investment market. A defined contribution scheme is one which requires a certain number of contributions of a certain value to be made to the scheme throughout your membership. On retirement, the fund which has accumulated will be used to purchase an annual income from an insurance company. For this reason, defined contribution schemes are also known as money purchase schemes. The annual income from a money purchase scheme is not known until you reach retirement and wish to sell your pension fund, thus they are somewhat risky investments. If you are lucky and economic conditions are favourable when you wish to purchase an annuity, the scheme has proved a good investment. If there is an economic slump when you come to purchase your annuity, the investment may prove a poor one and leave you with less income than you expected.

The safest type of money purchase pension scheme to invest in is probably a stakeholder pension scheme. This scheme works in the same way as any other money purchase scheme, but follows strict investment guidelines set out by the government, which aim to reduce the risk involved for savers. Stakeholder pensions are available from most financial institutions.

Stakeholder Pension

A stakeholder pension is a type of personal pension scheme, introduced by the government in an attempt to encourage people to save for their retirement. They are reasonably simple to understand, flexible and carefully monitored to ensure they provide a secure investment. Any UK resident can join a stakeholder pension scheme and both the pension holder and their friends and relatives can contribute to the savings fund. Stakeholder pensions are money purchase pensions. This means that you contribute money to the scheme which builds up into a fund; the money is invested and any investment returns are added to your fund. Your pension scheme provider will also claim tax relief on the contributions you make and add this to your fund. Upon reaching retirement you will be entitled to a tax-free lump sum, usually equal to approximately 25% of the total value of the fund. The rest of your pension fund will be used to buy an annual pension (annuity) for you from an insurance company. Stakeholder pensions are carefully monitored by independent experts to ensure that the investment portfolio into which your funds are placed is one with controlled risk. Investments are made for long-term gain, your money may be put into riskier ventures at the beginning of your membership to ensure maximum returns and then moved to low risk ventures as you approach retirement. There are also strict limits as to the amount that your scheme provider can charge you for administration. Although a stakeholder pension scheme offers savers no guarantees, it operates under controlled conditions and therefore provides reasonable security.

For more detailed information on the Pension system in the UK see: Pensions.