Money: Defined benefit still cream of the crop

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The Independent Culture
These are the present and proposed kinds of pension-

Defined benefit or final salary:

Linked to a proportion of final salary, typically either 1/60th or 1/80th for each year with employer. Considered the cream of the crop for employees, because they mean guaranteed benefits. But they penalise those who spend only a few years with the firm, particularly at the beginning of a career. They lead to uncertainty for employers, who must deliver the benefits no matter what investment returns have been.

Defined contribution or money purchase:

Contributions made by employers and staff into a fund which is invested. This produces a lump sum out of which an annuity (annual retirement income) is bought. Employers prefer defined contribution schemes because they do not have to guarantee benefits, only payments into the scheme, which they can set as high or low as they want.

Personal pension plans:

Private arrangements, whereby a person pays a certain amount each month or annually into a scheme run by a life insurer or similar provider. The money is invested and at retirement the lump sum buys an annuity. Employers rarely pay in.

Group personal pension schemes:

Similar to individual private pensions but the employer makes contributions into each person's scheme by paying a lump sum to the provider, who then distributes sums to each pension plan. When an employee leaves, s/he can carry that segment of the GPP with them to a new employer if they wish. However, some companies are believed to have high charges - paid by the employees.

Designated Pension Plan:

Proposed by OFT as a portable pension throughout a person's working life. Intended to be cheap and able to accept employers' contributions as and when they are made.

- Nic Cicutti

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