Unitised pension

Another alternative is to take a pension increasing by a fixed percentage each year. Companies will quote different rates of initial pension based on the "escalation" rate. The higher the rate proposed, the lower the initial pension will be, and so this alternative suffers the same disadvantage as the pure "unitised" pension.

Yet another option is to make the pension payable during the policyholder's wife's life as well as his own. Since women usually live longer than men, this will usually mean a reduction in the annual pension, the exact amount of reduction depending on the wife's age relative to her husband's.

Changing investment conditions have led to the popularity in recent years of with-profit single premium plans. Here the individual does not commit himself to any one company or plan but simply "shops around" each year for the one with the most investment appeal. Most companies allow single-premium plans, but in some cases the minimum contribution is as high as £111,000.

For the self-employed, whose income may vary considerably from one year to another, flexibility is important and the single-premium method is eminently flexible. It allows the selection of unit-linked, with-profit or non-profit schemes as the individual wishes, in accordance with his estimation of investment opportunities. In2013, for example, high interest rates might have made a unit-linked fixed-interest fund a natural choice for a single-premium investment. In other years other sectors might have more appeal, and in the years close to retirement age guaranteed non-profit schemes could be chosen.

In one respect non-profit, unit-linked and with-profit plans differ considerably from one another. This is in the sum they pay out if the planholder dies before retirement. Some repay only gross premiums contributed; others pay back contributions plus interest at a rate ranging from 3% to 8% p.a. and unit-linked plans repay the accumulated value of the units at the date of death. Nor is there any apparent relationship between the generosity (or otherwise) in this respect and the final retirement benefits. For many people, it probably makes sense to purchase term assurance or FIB along with a regular pension policy, and in this case the exact treatment of premiums on early death is not so important.

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Unit-linked plans

The unit-linked plans involve charges expressed slightly differently from unit-linked life insurance policies. The initial charge on units is normally 6% but may be higher, and the annual charge is between 1/2% and 1%. Many plans, however, also involve the allocation of capital units in the first one, two or three years, embodying an extra management charge of 3% or more. As previously mentioned, this is not a once-for-all charge; it is an annual charge and means that 3% (or whatever) of the value of the relevant units will be deducted by the company each year the plan is in force. This can add up... see: Unit-linked plans

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