Registered pension schemes
Schemes to provide pensions are generally registered pension schemes.*
There are four main types of pension scheme, called arrangements:-
Defined benefit arrangements
Benefits are determined by specified criteria, and are not dependent on the amount of any fund. A common type of defined benefits arrangement is a 'final salary' scheme, where the benefits depend on your salary and length of service, although many final salary schemes have closed in the last 15 years.
Money purchase arrangements
Money purchase arrangements are also known as defined contribution schemes. Benefits are entirely dependent upon the funds built up for the member. Most arrangements made by individuals are of this type, as are many company schemes. The following types of pensions are normally money purchase:
- Personal pensions
- Stakeholder pensions
- Retirement annuity contracts
- SSAS - Small Self Administered Schemes
- FSAVC - Free-Standing AVC schemes
- SIPP - Self Invested Personal Pensions
These occur when a scheme promises some kind of minimal value or benefit, irrespective of actual fund performance.
For example, the terms might be '1/60th for every year of service, or whatever the fund buys, if greater'. If performance was good then the full fund will be used and it will be a money purchase arrangement. If there was poor performance, then the scheme would pay out the 1/60th and be seen to be defined benefit.
Cash balance arrangements
A type of money purchase arrangement where, in the event that the funding fails to provide the required level of benefits, it will be made up to that level.
* In theory there can be other schemes which are not registered, but as these would not benefit from the favourable tax treatment of registered pension schemes their use is expected to be limited, normally only for people whose unusual circumstances prevent them qualifying for a membership of a pension scheme, or who are over their lifetime allowance and need alternative arrangements. Such schemes, however, fall outside the tax regime for pensions.
A pension is a long term investment; the fund may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.