Pension Scheme

By: EconomyWatch   Date: 21 September 2009

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A pension scheme provides income after retirement. Pensions are deferred compensations that offer tax advantages to both the employee and the employer. Pension schemes can be either in the form of annuity or cash balance. Pension schemes can be of various types, depending on the country and government regulations.

Pension Scheme: Types

The three types of pension schemes include:

·        Basic state pension scheme: A basic state pension scheme is a government pension based on the number of years one has paid, or been credited, through a state owned insurance contributor. In the UK, the basic state pension scheme states that men age 65 and women aged 60 can qualify for this scheme if they were born on or before 6 April 1950. A basic state pension can be claimed when one reaches the state pension age or opt for a one-off taxable lump sum payment in addition to the state pension. There is also a type of basic state pension scheme called the additional state pension. This is calculated upon claiming the basic state pension.

·        Personal pension scheme: Personal pensions are arrangements where one contributes a regular amount or a sum to a pension provider, who invests it accordingly. This fund is run by financial services companies or insurance providers. There is usually no upper limit on the number of personal pension schemes one can have. It does not affect the entitlement of the basic state pension. Stakeholder pension, a type of personal pension scheme, has to meet certain regulatory standards for valuation. A stakeholder pension scheme is meant for the self employed or for those whose employers do not offer any pension scheme.

·        Occupational pension scheme: An occupational pension scheme is set up by employers for their employees. In most cases, both the employer and the employee contribute some amount of money into the scheme. Occupational pensions may offer a death benefit plan or flexibility to get pension for early retirement due to ill health. In the US, the 401k and the 403(b) plans are occupational based. Occupational pension comes in two types:

  • Salary related scheme

  • Money purchase scheme

It is also necessary to choose a suitable pension advisory firm, which can guide you about the right pension scheme, the risks involved and the benefits of the product. Firms must be regulated and one can check with the state regulatory bodies for details.


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