Transcript

Occupational and personal pensions are collectively known as private pensions to distinguish them from the state pension. Occupational, or work-based pensions, are organized by your employer. Usually both you and the employer make contributions, and most employees are now automatically enrolled onto a pension scheme unless they choose to opt out. Personal pensions are something you organize yourself, regardless of your employer, or indeed whether you're even working at the time.

Whichever kind of pension you have-- and many people have both-- you'll probably most interested in how much pension you'll get when the time comes. And that depends on whether it's a defined contribution scheme, or a defined benefit scheme. Some companies and public sector bodies, like local governments, provide defined benefit schemes. The amount you get is based on a combination of how long you work for that employer and how much you earned. For that reason, they're sometimes called final salary, or average salary schemes.

The longer you work there, and the more you earned when you left, the more pension you'll get. And there are usually some really clear and simple rules for working it out. Some organizations, for example, say that if you're working and in their pension scheme for 40 years, you get a guaranteed 2/3, or 40/60, of your final or average salary paid for the rest of your life. And if you work for them for less than 40 years, you simply get a smaller proportion of it.

You're lucky if you have a pension like this because they're not widely available now. And these days the terms aren't as good as they were, mainly because people are living longer. So guaranteed pensions like this are expensive for employers.

Also with this type, it's the employer that takes all the risk. If the stock markets fall, your pension stays exactly the same. So if you have a defined benefit pension, then take serious financial advice before transferring it. You're almost invariably better off leaving it where it is unless you have a serious illness.

A defined contribution scheme, also known as a money purchase scheme, is what most people have these days, whether it's a workplace pension or your own personal pension. You usually pay in an agreed amount each month, and if it's a work-based pension then your employer will, too. All the money goes into your own pension pot.

But with this kind of pension, there's no guaranteed pay-out so you won't know in advance exactly how much you'll get. Your pension pot will grow according to the rise and fall of the investments in it, such as stocks and shares. But your pension provider will send you regular updates and forecasts based on the best information available at the time.

Then, when you retire, you decide how and when to invest or draw on your pension pot money to give you an income. You can have a guaranteed income by buying an annuity, take the pension pot as a lump sum, or simply take amounts as you need it. You're also allowed to take a tax-free lump sum of up to 25% of your pot-- handy if you want to go traveling or do home improvements.