Pensions - A word of Warning

Many companies are involved in personal pensions, but a word of warning is in order. Owing to the tax advantages, the personal pension with-profits plan ought to produce a final return significantly above that which could be achieved by investing in an endowment policy over the same period and converting the proceeds into an annuity. In a few cases, however (usually companies that do not specialise in personal pension business), this is not the case.

The unit-linked pension plans have, like their conventional counterparts, developed considerable sophistication. Almost all of each premium is invested in units in tax-exempt funds, usually parallel to the life insurance funds (property, managed, equity, fixed-interest securities). The planholder can decide into which of these funds to direct his premium in any year and also for a small charge switch his units from one fund to another.

Unlike the conventional plans, unit-linked schemes do not usually guarantee any amount of final pension. The benefits available at retirement age are obtained by purchasing an annuity with the proceeds of the units accumulated, and their value depends on investment performance over the life of the plan. Clearly the unit price could be very different at one's chosen retirement age from that a few months earlier or later, and so the plans allow considerable flexibility as to when benefits may be taken. The individual has to remember that with unit-linked schemes it may be very much to his advantage to defer taking the benefits, to allow the unit price to recover from a temporarily depressed level.

Some unit-linked plans have, however, introduced guarantees. Normally these involve a special fund (a non-unitised fixed-interest fund) which allows the company to guarantee a value at retirement age and hence an actual pension. Such guarantees are no different from the nonprofit ones discussed earlier, and may be useful at ages close to retirement.

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Non-profit single-premium plan

A way of avoiding this risk is to use a non-profit single-premium plan. Here, the company guarantees the rate of interest that will be earned on each contribution, the rate being that which it can earn at the date of each premium, as it is related to the current yield on long-term fixed-interest investments. The annuity rate is not guaranteed, however. It should be noted that the difference between this and the deposit administration scheme is that the non-profit plan guarantees that each premium will earn a specific rate of interest (different for each premium) in each year to retirement, whereas... see: Non-profit single-premium plan

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