Defined benefit/final salary schemes

Defined Benefit Pension also known as a Final Salary Pension or Superannuation Scheme

A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

These schemes have become rarer in recent years as the employer/sponsor’s have no indication of the eventual cost to them in providing the scheme. Further the company’s directors may be held liable for any shortfall in the pension scheme’s funding. For this reason many employers have moved away from offering DB schemes in order to limit their liability.

A defined benefit plan is 'defined' in the sense that the benefit formula is defined and known in advance. Conversely, for a "defined contribution retirement saving plan", the formula for computing the employer's and employee's contributions is defined and known in advance, but the benefit to be paid out is not known in advance.

The most common type of formula used is based on the employee's terminal earnings (final salary). Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker's career.

In the private sector, defined benefit plans are often funded exclusively by employer contributions. For very small companies with one owner and a handful of younger employees, the business owner generally receives a high percentage of the benefits. In the public sector, defined benefit plans usually require employee contributions.

Over time, these plans may face deficits or surpluses between the money currently in their plans and the total amount of their pension obligations. Contributions may be made by the employee, the employer, or both. In many defined benefit plans the employer bears the investment risk and can benefit from surpluses.

What is attitude to risk? (ATR)

Everyone has a different attitude to risk and their attitude to risk may/will vary over their lifetime, most of us becoming more risk adverse as we get older. In simple terms on a scale of 1 to 10, if 1 is putting your money in a tin box under your bed then typically Australian mining shares would be 10. Although there is always a risk to the tin box!

Choosing the right investments means balancing how much you are prepared to lose with how much you hope to earn.

This means understanding risk and your attitude to risk – how much risk you are prepared to take with your money and assets in a particular time-frame.

This can be affected by many factors, including your personal situation, age, goals and the current economic climate.

Where have you heard about attitude to risk?

If you talk to a financial adviser they should ask you about how much risk you are prepared to take with your money. You may also find questions about attitude to risk on investment applications forms or online investment platforms.

What you need to know about attitude to risk...

Usually, the higher the risk you are willing to take, the higher the potential returns could be – but equally, the higher the risk of losing your money too.

Low risk investments are likely to offer lower rewards, but have less risk attached too. You have to choose the options you are comfortable with.

Your attitude to risk can of course change over time. You might become much less risk averse if you came into a big sum of money, for example, or much more risk averse if you start to have a family and need to think about securing your children's future too.

Islamic banking and finance

Islamic banking or Islamic finance (Arabic: مصرفية إسلامية‎) or sharia-compliant finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic banking/finance include Mudarabah (profit-sharing and loss-bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost-plus), and Ijara (leasing).

Sharia prohibits riba, or usury, defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam ("sinful and prohibited").

These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity, a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Their number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and around $2 trillion was sharia-compliant by 2014 Sharia-compliant financial institutions represented approximately 1% of total world assets concentrated in the Gulf Cooperation Council (GCC) countries, Iran, and Malaysia. Although Islamic banking still makes up only a fraction of the banking assets of Muslims, since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.

The industry has been lauded for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West, and noted as the "most visible mark" of Islamic revivalism, its most enthusiastic advocates promise "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented. However, it has also been criticised for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters, and instead selling banking products that "comply with the formal requirements of Islamic law" but use "ruses and subterfuges to conceal interest", and entail "higher costs, bigger risks" than conventional (ribawi) banks.

Living abroad and the State Pension

Contents

• Claim State Pension abroad

• How your pension is affected

• Paying Tax

• Report a change in your circumstances

Claim State Pension abroad

There will be no change to the rights and status of EU citizens currently living in the UK until 30 June 2021. You and your family can apply to the EU Settlement Scheme to continue living in the UK.

You can claim State Pension abroad if you’ve paid enough UK National Insurance contributions to qualify.

Get a State Pension Statement if you need to find out how much State Pension you may get.

Make a claim

You must be within 4 months of your State Pension age to claim.

To claim your pension, you can either:

• Contact the International Pension Centre

• Send the international claim form to the International Pension Centre

If you live part of the year abroad

You must choose which country you want your pension to be paid in. You cannot be paid in one country for part of the year and another for the rest of the year.

Bank accounts your pension can be paid into

Your State Pension can be paid into:

• a bank in the country you’re living in

• a bank or building society in the UK

You can use:

• an account in your name

• a joint account

• someone else’s account - if you have their permission and keep to the terms and conditions of the account

You’ll need the international bank account number (IBAN) and bank identification code (BIC) numbers if you have an overseas account.

You’ll be paid in local currency - the amount you get may change due to exchange rates.

When you’ll get paid

You can choose to be paid every 4 or 13 weeks.

If your State Pension is under £5 per week, you’ll be paid once a year in December.

Defined contribution schemes

Defined contribution (DC) schemes are occupational pension schemes where your own contributions and your employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. The value of the ultimate benefits payable from the DC scheme depends on the amount of contributions paid, the investment return achieved less any fees and charges, and the cost of buying the benefits.

A DC scheme has a set contribution for the employee and a set contribution for the employer. For example, in some DC schemes, the employer and the employee each contribute 5% of the member's earnings, or 10% in total.

Some DC schemes allow members to choose the level of contribution they wish to pay, with a related employer contribution.  Contributions are invested on behalf of each scheme member.

The retirement benefits for each member depends on how much money has been built up by the member's retirement date and so it is not possible to know in advance what pension benefits a member will receive.