Pension Scheme

Definition

A pension scheme is an arrangement primarily intended to deliver financial benefits to individuals (referred to as members) upon retirement. Besides the retirement pension, such schemes may offer additional benefits which might include health insurance, life insurance, or a pension for the dependants of deceased members.

Types of Pension Schemes

Pension schemes can be broadly categorized into:

Occupational Pension Scheme: A pension plan offered by an employer for the benefit of its employees. It can either be a defined benefit or a defined contribution plan.
Personal Pension Scheme: A type of pension plan that is managed by the individual rather than an employer. These are typically defined contribution schemes wherein contributions are invested, and the returns are used to provide retirement income.
Stakeholder Pension Scheme: A type of defined contribution personal pension plan that follows specific government standards intended to be a low-cost and easily accessible retirement savings option for individuals.

Examples

Defined Benefit Pension Scheme: A retired employee receives a pension amount based on their salary history and length of service with the company, ensuring steady and predictable income post-retirement.
Defined Contribution Pension Scheme: An employee contributes a portion of their salary into a retirement account. The final pension received depends on the contributions made and the performance of the investment options chosen.
Dependant’s Pension: Upon the death of a scheme member, their spouse or children receive pension benefits. For instance, a company might continue to provide 50% of the retiree’s pension to their surviving spouse.

Frequently Asked Questions (FAQs)

What is a pension scheme?

A pension scheme is an arrangement that provides members with a pension and other benefits, often funded during their working life and paid during retirement.

What are the main types of pension schemes?

The main types include occupational pension schemes, personal pension schemes, and stakeholder pension schemes.

Can I have more than one pension scheme?

Yes, individuals can hold multiple pension schemes, such as a workplace pension and a personal pension.

What is the difference between a defined benefit and a defined contribution pension scheme?

A defined benefit scheme provides a guaranteed payout at retirement based on salary and service length, while a defined contribution scheme depends on the contributions made and their investment performance.

Are benefits available after the member’s death?

Yes, some pension schemes offer dependant benefits, extending payments to eligible family members.

Occupational Pension Scheme: Pension provided as part of employment benefits, often funded by the employer.
Personal Pension Scheme: A privately managed pension plan typically under a defined contribution system.
Stakeholder Pension Scheme: A government-regulated pension plan designed to be accessible and cost-effective.

Online References

Suggested Books for Further Studies

Pensions for Dummies by Eks Barnardo - This book provides in-depth insights into various pension schemes and retirement planning.
The Oxford Handbook of Pensions and Retirement Income by Gordon L. Clark - A scholarly examination of all aspects of pensions including the economics, regulation, and policies surrounding retirement income.
Pensions: Policies, New Reforms and Current Challenges by Wharton School Publishing – An authoritative resource on the evolution, reform, and challenges of pension systems around the globe.

Accounting Basics: Pension Scheme Fundamentals Quiz

### What is a pension scheme? - [x] An arrangement designed to provide retirement income to members. - [ ] An investment plan for short-term savings. - [ ] A healthcare benefit plan. - [ ] A type of employment contract. > **Explanation:** A pension scheme is specifically designed to provide retirement income to its members. ### Which type of pension scheme is typically offered by employers? - [x] Occupational Pension Scheme - [ ] Personal Pension Scheme - [ ] Stakeholder Pension Scheme - [ ] Health Savings Account > **Explanation:** An Occupational Pension Scheme is typically offered by employers and forms part of employee benefits. ### What characterizes a defined benefit pension scheme? - [x] Guaranteed retirement income based on salary and service. - [ ] Retirement income based on contribution and investment performance. - [ ] Only available to private sector employees. - [ ] No specific rules or contributions defined. > **Explanation:** A defined benefit pension scheme guarantees a retirement income based on the employee's salary history and the number of years they have worked. ### What type of pension scheme allows individuals to manage their retirement savings independently? - [ ] Occupational Pension Scheme - [x] Personal Pension Scheme - [ ] Dependent's Pension Scheme - [ ] Health Insurance Scheme > **Explanation:** A Personal Pension Scheme allows individuals to manage their retirement savings independently of an employer. ### Which pension plan is characterized by government-regulated low-cost and accessibility? - [ ] Occupational Pension Scheme - [ ] Defined Benefit Scheme - [ ] Defined Contribution Scheme - [x] Stakeholder Pension Scheme > **Explanation:** The Stakeholder Pension Scheme is designed to be low-cost and easily accessible with regulations set by the government. ### Can a single individual hold multiple pension schemes? - [x] Yes, multiple pension schemes can be held. - [ ] No, individuals are limited to one pension scheme. - [ ] Only if allowed by employer policies. - [ ] Only retirees can hold multiple. > **Explanation:** Individuals can hold multiple pension schemes, including workplace and personal pensions. ### What typically determines the benefits a member receives in a defined contribution scheme? - [ ] Length of employment - [x] Contributions made and investment performance - [ ] Salary at retirement - [ ] Length of service > **Explanation:** In a defined contribution scheme, the benefits received at retirement are determined by the contributions made and the performance of the investments chosen. ### Are there pension benefits available after a member’s death? - [x] Yes, for eligible dependents. - [ ] Yes, but only for children. - [ ] No, benefits cease upon death. - [ ] Only if specifically requested. > **Explanation:** Certain pension schemes provide benefits to eligible dependents such as spouses or children after a member's death. ### What defines a stakeholder pension scheme? - [ ] High cost and employer-specific - [ ] Only available to high earners - [x] Government-regulated, low-cost, and accessible - [ ] Benefit based on salary alone > **Explanation:** Stakeholder pension schemes are government-regulated to be low-cost and widely accessible. ### What is a distinguishing feature of an occupational pension scheme? - [x] It is employer-provided. - [ ] It is independently managed by individuals. - [ ] It has variable contributions and benefits. - [ ] It provides only lump-sum payments. > **Explanation:** An occupational pension scheme is provided by the employer as part of employee benefits.

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