Pensions

Originally pensions were provided by employers who, in effect continued paying an income for life, which was related to the level of income during work. However, because not every employer was generous enough to offer this ‘post work’ income, insurance companies introduced private pensions in the form of ‘deferred annuities’. These deferred annuities offered a guaranteed lifetime income starting from a future date, based on a level of contributions.

From this background grew the two main types of pension provision in the UK, being Defined Benefit and Defined Contribution.

Pension legislation has evolved and developed over many years, culminating in 2006 with ‘A Day’ or ‘Pension Simplification’ - aiming to unify the treatment of all pension schemes.

However, the different basis of Defined Benefit and Defined Contribution schemes inevitably means that it is difficult to compare them exactly in terms of how benefits are calculated and/or how future benefits can be valued now.

A very good overview of how pensions work is available from the FSA website, download it here.

We have a fairly simple view about pensions, which mirrors the two phases of their existence:

• Accumulation Phase

When building a pension fund, put as much in as you can, as early as you can and make it grow as much as you can!

• Income or Benefit Phase

When taking benefits, take as much as you can as early as you can!

Clearly there are considerations – tax being but one – to take into account in implementing this view, but to get the most from your pension planning, we believe it is a useful guiding principle.