At some point during their working life, the vast majority of people will join a company pension scheme. After the initial concern of picking up a little less in their wage packet each month due to making contributions to the scheme, most people see the distinct advantages of being a member of a company pension. After all, if you take into account the contributions made by employers and the government, by joining a company pension you are in fact getting a pay rise.
Benefit or Contribution?
Although most employees can see the advantages of taking out a pension, many struggle to decide what type of scheme will be the most beneficial for their personal circumstances. In essence there are two main pension types, defined benefit and defined contribution. The latter of the two is probably the more common type currently but arguably has more risk attached, as contributions made by the employee and employer are invested in the stock market, meaning that the final value of your pension at retirement age is subject to stock market fluctuations.
A defined benefit scheme gives you the advantage of knowing that the value of your pension when you come to retire is guaranteed. Although your contributions over the years will still be paid into the stock market, the amount you receive when you retire is pre-agreed and based on your salary. With this in mind, your pension benefits will continue to rise in line with any salary increases you receive while working. As the final value of a defined benefit pension is not dependent on the stock market, you can enjoy peace of mind knowing you will receive a guaranteed amount at retirement. This final amount is based upon three key elements; the number of years you have been a member of the scheme, your final salary (or an average of your career salary) and the accrual rate of the scheme.
Pensions Stability
Of course, by pre-agreeing a final pension amount, some companies are occasionally unable to fulfil their obligations or alternatively a company may become insolvent. This is why all defined benefit schemes are protected by the Pension Protection Fund. If the worst happens, members will still receive their benefits at retirement, although they may not receive the full amount. This lingering uncertainty, along with varying views on long-term positions depending on the scheme provider, has led to brokers working towards better pensions stability. With the needs of members, trustees and companies competing against one another, a more efficient form of pension management is required, leading to resources such as those found on the Aon Hewitt website.
Recent government changes mean that all employers will eventually have to offer their employees membership of a company pension scheme. Starting with larger organisations, the roll-out of this new legislation is set to be complete by 2018. Soon, every employee will be auto-enrolled into a pension scheme, although there is an option to opt-out if desired. Despite defined contribution schemes being more popular with employers as there is less risk involved for them, if you get the opportunity to join a defined benefit pension, the advantages for you personally are numerous.
