If you’ve just joined the workforce or have been working for a while now and are considering your retirement options, then a few options here are bound to enhance your awareness.
It’s important to understand that the main focus of this article is on the various types of private pensions that you can avail yourself of.
Our categories are based on three main factors: the investment model and the type of load sharing between employees and employers.
We shall also discuss how one option is different from the other, so let’s begin without further ado.
- Defined contribution pension plan
In this type of retirement plan, the main focus is on an individual’s capacity to pay, which is the goal around which the entire scheme is developed.
So, for instance, you state that your maximum investment potential every month is £1000. The number of years you’ll continue to be employed is 30.
Now the corpus, or the total fund value at the time of retirement, would be arrived at considering these factors.
This sort of plan is ideal for you if you’ve got a fixed income and have a specific amount of money that you can invest.
- Defined benefit pension plan
In this type of plan, your corpus or the intended total receivable dictate the details of the scheme along with the payment amount and intervals.
So if you were to say that you’d want £60,000 annually post-retirement, then your financial advisor will come up with a payment structure that would help you get that amount or an amount as close to it as possible when you retire.
An additional feature in this investment model is the defined benefit transfer values, where you’ll be given the option to switch to a different investment plan at some stage of your investment. In this, you’ll be paid a sum of money that can be considered a bonus you’d receive on top of the benefits of the new pension scheme to which you’ve switched.
- Personal retirement savings account
Unlike the two options mentioned above, your employer doesn’t need to contribute to the scheme in this form of investment. Of course, some employers do contribute, but that is solely their choice.
Think of it as a defined contribution plan without your employer adding any funds to it, usually.
This plan is ideal for those of you who are self-employed or want to start a second pension plan as your first plan was initiated by your previous employer.
Interestingly, in switching jobs or starting your own business, you’d still have your occupational pension plan, but the option of investing in a new plan becomes available.
- Retirement annuity contracts
Considered to be the formal title for a personal pension plan, individuals themselves typically enter into retirement annuity contracts through either an investment firm or, as is more common, through life assurance companies.
There isn’t much to be thought about in such schemes, but even then, it is necessary to know the three factors affecting the total money you’d be entitled to get. The first factor is the amount of money you invest. The second factor is the rate of returns on your investment, and the third is the fees or deductibles that your policy provider would charge at the maturation of your scheme.
- Invest in mutual funds
A slightly unconventional method, but it is ideal for those who understand how the equities market, also known as the stock market, works. Another factor to be considered is your risk appetite, and based on that, you can create your portfolio or seek aid from a financial advisor who would do it for a fee. Finally, to understand mutual funds better, learn more about them.
There are tax benefits on some mutual funds options; most of these options have a long lock-in period, meaning that your money shall remain invested for that time. Also, at no point before that would you be able to withdraw this money without incurring a penalty.
Despite the slightly higher risk factor, many young professionals prefer this over the conventional retirement options as it prevents the involvement of third parties to an extent. In addition, you get a greater portion of the total corpus and do not have to share a sizable chunk of it with your financial advisor.
If you have gone through all the points, you’re armed with the basics and can now focus on understanding the different return rates offered within each investment model.