New legislation allows increased payment flexibility

If someone is a member of a defined contribution scheme from 6 April 2015, they will be able to access their pension fund, in full, without needing to purchase an annuity. With a defined contribution pension, you build up a pot of money that you use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay in and the fund’s investment performance.

Shopping around to obtain a higher rate

Prior to the commencement of the pensions reform changes, historically purchasing an annuity has been the most common way of turning someone’s pension savings that they’ve built up over the years into an income that will last them the rest of their life.

Salary-related pension based on the number of scheme membership years

Some employers offer these schemes, also known as ‘salary-related pension schemes’. When someone retires from the scheme, it pays them a pension where the benefit is based on rules set out by the scheme.

Building up a pot of money that can be used to provide an income in retirement

With a defined contribution pension, the member builds up a pot of money that they can use to provide an income in retirement. Unlike defined benefit schemes, which promise a specific income, the income the member might get from a defined contribution scheme depends on factors including the amount they pay in and the fund’s investment performance.

Safeguards to protect pension benefits

Transfers from defined benefit schemes to defined contribution schemes will continue to be allowed (but will exclude pensions that are already in payment). However, transfers from defined benefit schemes to defined contribution schemes will be restricted for members of unfunded public sector schemes, although you may be allowed to transfer in very limited circumstances.

Defined benefit pension schemes beyond 6 April 2015

The transitional rules on triviality and small pots will continue to apply to defined benefit pension schemes beyond 6 April 2015. The minimum age for accessing pension savings in this way will reduce from 60 to 55.

Investment trusts are based upon fixed amounts of capital divided into shares. This makes them closed ended, unlike the open-ended structure of unit trusts. They can be one of the easiest and most cost-effective ways to invest in the stock market. Once the capital has been divided into shares, you can purchase the shares. When an investment trust sells shares, it is not taxed on any capital gains it has made. By contrast, private investors are subject to capital gains tax when they sell shares in their own portfolio.

Open-ended investment companies (OEICs) are stock market-quoted collective investment schemes. Like unit trusts and investment trusts they invest in a variety of assets to generate a return for investors.

The New Individual Savings Account (NISA) rules were introduced in July 2014 designed to help and encourage people to save more for their future and give savers and investors more flexibility and a larger tax-efficient allowance than ever before. This tax efficient ‘wrapper’ can hold investments such as unit trusts, other collectives such as OEIC’s, shares and cash.

Unit trusts are a collective investment that allows you to participate in a wider range of investments than can normally be achieved on your own with smaller sums of money. Pooling your money with others also reduces the risk.

If you require your money to provide the potential for capital growth or income, or a combination of both, and provided you are willing to accept an element of risk, pooled investments could just be the solution you are looking for. A pooled investment allows you to invest in a large, professionally managed portfolio of assets with many other investors. As a result of this, the risk is reduced due to the wider spread of investments in the portfolio.

The volatility experienced in global markets over the past six years has tested the nerves of even the most experienced investors, making it a difficult time for individuals who rely on income from investments for some or all of their needs.

When putting together an investment portfolio there are a number of asset classes, or types of investments, that can be combined in different ways. The starting point is cash – and the aim of employing the other asset classes is to achieve a better return than could be achieved by leaving all of the investment on deposit.

One of the principal tenets of spreading risk in your portfolio is to diversify your investments. Diversification is the process of investing in areas that have little or no relation to each other.

The first step to building wealth starts with a disciplined decision to pay yourself first, then compounds with a disciplined investment approach.