Raising Individual Financial Awareness - Essay Example

One type of personal pension is a defined contribution pension, also known as money purchase scheme, which is bought by contributions made by the employer and the employee. Defined benefit pension, also known as final salary schemes, is another type of pension scheme wherein the benefits are paid based on the scheme rules such as time and changing salary levels and mortality rates, etc. The best way to differentiate between the above mentioned 2 schemes is by identifying the riskholder. Employer is the risk holder as he underwrites the vast majority of costs attached with defined benefit schemes.

Employee or the scheme member is the risk holder as contributions are paid back at fixed levels, therefore if the contribution rates are not increased when the returns are poor, the retirement benefits will also be lower than they had planned for (TSSA). Bill Murray, in case of , defined contribution scheme, can increase his contribution if he feels it is necessary to increase his pension. Therefore in case he wants to have ?18,000 as his annual retirement he needs to increase his pension pot to ?

284,000, assuming ?100,000 pension pot fetches on average ?6341 to a healthy 65 year old male (Annuity). In case of, defined benefit pension he will know roughly how much he will get, as the amount will depend on the length of time he has worked and his final salary. Therefore, if the scheme is based on 60ths i.e. Bill will get 1/60th of his final salary for his pension each year, and assuming he has been working for 42 years, his final salary should be ?25,714. This should be easily achievable because the average salary in 2010 for marketing was ?

37500 (ITJobsWatch). Bill Murray should choose the defined benefit scheme because it gives him certain amount irrespective of the state of the economy. The scheme will also pay him more if his salary is anywhere close to the average salary if not more. Government has proposed to s include an option for a flat rate State Pension of around ?140 a week for a single person and change in the limit of state pension age (DirectGov, State pension Reforms). The reason behind is the need to meet the needs of future pensioners, who are saving lesser, and with people living longer, the burden of pension also increases on the Government.

Part B Houses bought to be rented out should have a buy to let mortgage, which is often interest only. The full amount that was borrowed is repaid at the end of the mortgage. Buy to let mortgages often require the rental for the property to be a set percentage above the mortgage repayment (Mortgages). HSBC’s tracker rate mortgage is suitable for Annie. It has a repayment rate of 3.99% plus base rate and costs ?1499 to set up (HSBC). Table 1 below estimates if buying a flat and renting out is a worthwhile investment.

The below estimates are based on an assumption the flat is occupied by tenants for all 12 months. Table 1: Estimates of renting the flat (all figures in ?) Rental Income (?1500*12) 18000 Commission (15% of ?18000) (2700) Insurance (assumed) (1000) Interest (based on HSBC rate) (5850) Maintenance (assumed) (1500) Other costs (assumed) (500) Profit/(Loss) 10550 As per the estimates above, Annie would make about ?10,550 annually. Interest payments are low merely because the deposit of ?70,000 which Annie has provided.

When Annie intends to sell