Pension

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A pension is an income given to a person usually after they have retired. If you thought house prices are expensive then your pension will make them seem cheap! There are several different types of pension (described below).

In recent years pension fund trustees have had to cope with several significant problems, these being:-

  • In the 90's there was also a significant pension miss-selling scandal. A lot of people in either final salary schemes or in Public Sector Pensions schemes were persuaded by commission paid financial advisers to quit there schemes and join a money purchase scheme. This lead them to an outcry and demands for compensation.
  • Gordon Brown dividend stealth tax robbed pensions of £5billion per year.
  • Longevity, people are living longer but they still want to retire at 60.
  • Stock market collapse

Inflation can present a significant problem to savers as it can seriously erode the purchasing power of money. It is for this reason that public sector pension schemes are index linked to the RPI (not CPI). For private sector pensions you need to read the small print to see if they are indexed linked.

Pensions come in many different forms at a high level pensions can be catergorised in to the following catergories:-

  • State Pension
  • Company Pension
  • Personnel Pension e.g SIPPS

Final Salary Pension Scheme

A final salary pension scheme pays out an amount of money that is linked to the average of your last few years salary. The investment risk is born by the company as opposed to the employee. The Final Salary Scheme was viewed generally viewed as a good pension scheme however, it was killed of by Gordon Brown stealth taxes and the stock market collapse.

Provided the scheme is well funded then there is thus no risk for the employee. If the company goes bankrupt and the pension scheme was not well funded then the employees may either loose all or some of there pension.

While Chancellor Gordon Brown introduced a new stealth tax that cost the pension funds £5billion per year. This tax and the stock market crash resulted in a lot of companies final salary pensions schemes being closed.

Money Purchase Pension Scheme

A money purchase scheme pays out an amount of money that is linked to the return on the investments. The investment risk are thus born by the employee.

Public Sector Pensions

These schemes tend to be final salary and index linked to inflation. They are often refered to as gold plated. They are also usually under funded as such in future years there will either have to be an increase in taxes to cover the liabilities of these schemes or there payouts will have to be reduced e.g. like Equitable Life.

What does this mean for house prices?

Following the collapse of final salary pension schemes a lot of people decided to buy property as they saw it as a risk free investment. This is one of the reasons for the growth in the Buy to let market. This meant that a lot of money has flowed from the stock market in to the property market.

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