Pension Options Explained…
In This Comprehensive Video Guide, Joslin Rhodes Founder Neil, Explains What You Need To Know…
At Joslin Rhodes, we make pension options clear and jargon-free, so you understand the available routes.
In the video, Neil talks you through…
✅ The Different Types of UK Pension Schemes
✅ Advantages & Disadvantages of These Schemes
✅ Taking Tax-Free Cash Lump Sums
✅ Guaranteed Income Vs Flexible Access To Your Money
✅ Drawdown vs Annuities
and lots more…
There are 2 types of pension systems in the UK – defined benefits schemes and defined contribution schemes.
Let’s look at each in turn.
1. Defined benefits schemes
These are run by an employer and all employees will be members of the scheme.
Employees will usually pay a fixed % of their salary into that scheme. In return, when they retire, they’ll get a guaranteed, fixed pension for life. This is called a scheme pension.
It helps to think of it like a locked box.
On the side of the box is a slit, and out of that slit comes pound notes every month.
The amount of money an employee gets each month is based on a formula – broadly calculated by their number of years of service and their final salary. They may also get a company lump sum.
Advantages of a defined benefits scheme
- It’s simple.
- They don’t have to worry about investment returns – they know exactly what they are going to get.
- It’s guaranteed because if there’s not enough money in the scheme to pay the pensions, the company is asked to put more money in. It’s called an employer subsidy.
- It’s also protected by the Pension Protection Fund – if the employer goes bust, to a large degree the benefits within it will be protected.
Disadvantages of a defined benefits scheme
- Largely, it’s hardwired and inflexible – like a locked box.
- You have very little choice about how you receive the benefits.
- It will die with you, or your spouse.
It’s called a defined benefits scheme because it’s very easy to define what the benefits are.
2. Defined contribution schemes
Defined contribution schemes are different – every person has their own pot.
If it’s an employer scheme, the employee will pay a % in, and so will their employer. If it’s not linked with employment, it’s just down to the employee.
Once the money is in there, it’s up to the member to make a decision as to how to invest.
They will usually choose from a range of investment funds – they pay money in and hope it grows over time.
This sort of scheme is ‘defined’ in that you know how much you are paying in, but you don’t know how much will be paid out when you retire.
When retirement comes, you have 2 mechanisms that allow you to access those funds:
Purchase an annuity
You take some of the money that you’ve accrued and give the rest to an insurance company which then gives you a fixed, guaranteed income.
Unlike a defined benefit scheme, you can customise an annuity at the outset – like changing the amount of benefit your spouse might receive.
But then it’s set, ready to dispense guaranteed money from there after – just like the locked box image that we mentioned with ‘defined benefit schemes’. You can also get fixed-term annuities.
Advantages of an annuity
- It’s simple.
- It’s guaranteed.
- It’s customisable at the outset.
Disadvantages of annuity
- Once chosen, it’s hardwired and inflexible.
- It will die with you or with your spouse (but if you live a long time, you may get back more than you paid in).
We tend to think of these as more like a barrel than a box.
And in the barrel, you have underlying investment funds that need to be managed over time.
Imagine on the side of the barrel is a tap which means you can draw from it whenever you like (there are sometimes tax implications with this).
Advantages of drawdown
- Flexibility – you can take out what you like when you like.
- It is inheritable by other people – once you die, whatever is left can be left to whoever you choose.
- Investment risk – if you make poor investment choices, or the value of the markets falls significantly, the value of your pot goes down.
- Withdrawal risk – this is a double-edged sword. If you withdraw too much early on, you may not have enough later.
- But, if you’re too scared to draw money out, you end up not taking advantage of the flexibility.
So, ‘what’s best?’ I hear you ask
So, these are the mechanisms available. Neither’s right or wrong.
We firmly believe there’s no point jumping in with “You need to do this with your pension.” or “Choose this investment, this one’s good.” straight off the bat.
To know what’s best, we first need to know what it needs to be best at.
We spend time getting to know exactly what you want out of life and what you want in retirement.
Then we begin looking at whether or not you have enough pound coins in your pensions, savings etc. to do it.
And there’s the magic word, ‘ENOUGH‘.
It’s about us working with you to answer, ‘Enough for what?’.
And this could be any number of things, that when combined give you your ideal life and lifestyle.
So your ‘for what?’ could be…
- “I want to know I can retire when I choose.”
- “I want to be able to look after my family.“
- “I want to enjoy holidays and travel more.”
- “I want to know I’m working because I want to, not because I have to.”
It’s about building all your ‘for whats?’ into a plan that shows either you’ve enough already to do the things you want.
Or if not…
What needs to be done with your pensions, savings, and investments to make it happen.
Our service gives you the confidence & knowledge to make informed financial decisions, removing any financial worries, anxiety or stress so you can get on with life doing what matters most to you.
Ready to get things started?
It begins with an initial consultation. This is no obligation and no fee.
So, you’ve nothing to lose by talking to us.
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