Final salary (defined benefit) pension schemes are often seen as being very generous, however, most schemes are now closed to new members – building your pension via a defined contribution pension scheme is now the common method for retirement planning. The employer carries all of the investment risk with a final salary pension scheme, which is the opposite of a defined contribution pension scheme: the employee carries all of the investment risk. This means that choosing the most appropriate investment strategy for your attitude to risk and capacity for loss is now very important and should not be overlooked.
One way to build your pension is to set up a regular contribution and benefit from the compound effect (growth on growth) – you are in control of making contributions and retain flexibility by being able to increase or decrease them at any time. Modern pension providers / platforms make it easier for us (as financial planners) to diversify your pension contributions across asset classes and geographic locations to help reduce investment risk.
An additional benefit is that you can receive tax relief from the Government on your contributions – the tax relief received is dependent on your marginal rate of income tax. We will not go into too much detail on tax relief in this text – please contact us for more information and we can tailor our answer to your personal situation.
To answer our question, pension contributions are more relevant than ever!