What is a Pension?
Often, when we are looking at clients’ plans for the future, we start talking about planning for later life, and one of the most obvious financial ways to plan for later life is to use pension savings.
But what is a pension?
A pension is a retirement savings plan that provides an individual with a source of income during their retirement years. The plan is typically sponsored by an employer or the government, and the individual contributes a portion of their salary or earnings to it over the course of their working years.
The money that is contributed to the pension plan is invested, and the investment earnings are used to fund the pension benefits that the individual will receive in retirement.
Are there different types of pensions?
There are several different types of pensions available, each with its own features and benefits. Here are some of the most common types of pensions:
Defined Benefit Pension: A defined benefit pension is a type of pension plan where the employer guarantees a certain level of retirement income for the employee based on a formula that takes into account factors such as salary and years of service. These plans are typically offered by government employers and larger corporations.
Defined Contribution Pension: A defined contribution pension is a type of pension plan where both the employee and employer make contributions into an account that is invested in various assets such as stocks, bonds, and mutual funds. The final retirement benefit is based on the amount of money accumulated in the account at retirement.
Self-Invested Personal Pension (SIPP): A SIPP is a version of a defined contribution pension plan that allows individuals to choose and manage their own investments. This type of pension plan is typically suitable for individuals who have investment experience or want more control over their retirement savings.
Workplace Pension: A workplace pension is a type of pension plan where both the employee and employer make contributions into an account that is managed by the employer. These plans are mandatory in the UK under auto-enrolment legislation and are designed to encourage individuals to save for retirement. These days, they are most likely to be a defined contribution pension, though some employers, usually in the public sector) may offer a defined benefit pension.
Personal Pension: A personal pension is a type of defined contribution pension plan where an individual makes contributions into an account that is invested in various assets such as stocks, bonds, and mutual funds. These plans are typically suitable for individuals who are self-employed or who do not have access to a workplace pension.
It’s important to carefully consider the features and benefits of each type of pension plan and seek professional advice before making any decisions.
What types of investments can be made within a pension plan?
The types of investments that can be held within a pension vary depending on the specific pension plan and the investment options offered by the provider. However, here are some common types of investments that can be held within a pension:
Stocks and shares: Many pension plans offer the option to invest in stocks and shares. This can include individual stocks or shares, as well as funds that invest in a diversified portfolio of stocks.
Bonds: Bonds are fixed-income securities that can be held within a pension. They are generally considered to be lower-risk investments than stocks and shares but also tend to offer lower returns.
Commercial Property: Some pension plans offer the option to invest in commercial property, either directly or through a commercial property fund. Some businesses find owning their base of operations through the pension schemes of the directors gives them security of tenure and a very tax efficient arrangement, but it can leave ‘all your eggs in one basket’.
Cash and cash equivalents: Pension plans allow for the investment of cash or cash equivalents, such as money market funds or savings accounts.
Alternative investments: Some pension plans offer the option to invest in alternative investments, such as hedge funds, private equity, or commodities.
It’s important to note that the specific investment options available within a pension can vary depending on the provider and the type of pension plan. Additionally, investment options may be subject to certain restrictions or limitations, such as minimum or maximum investment amounts or restrictions on the types of assets that can be held within the pension. It’s important to carefully review the investment options available within a pension and seek professional advice before making any investment decisions.
It is very important that you receive advice from a suitably qualified and regulated independent financial adviser in relation to pensions. You should check any pensions/investment advisers out on the FCA register as a minimum.
Please contact me if you would like to discuss how you can use profits from your company to plan for your later life.