If pensions were drug cartels...
Updated: Mar 5
*DISCLAIMER* I am not advocating the use of drugs #EquitiesOverEcstasy
Based on my deep understanding of the drug world (i.e. I've seen Breaking Bad); I thought I'd liken the two main types of pension scheme (aside from the state pension) to running a drug cartel (because it's Sunday and I'm bored).
First off, if pensions were drug cartels, we'd all have hella glamorous retirements: dropping our grandkids off to school in our Bimmers and drinking Cristal for breakfast. But I doubt any self-employed drug lords have set up a pension scheme as you're probably more likely to get murdered than make it to retirement age (please note, if any sensible drug lords are reading - you'd be entitled to a DC scheme).
For those of you with more conventional careers, I've come to the conclusion that Walter and Jesse (from Breaking Bad) are a pretty accurate representation of the two main types of pension scheme. Who knows, maybe this is what the characters were based on?
1. Defined benefit (DB) - you receive a guaranteed pension each year based on either your final or average salary and the number of years you've worked for that company i.e. if you've worked for the same company for 10 years and your salary upon retirement is £24k - your boss will pay you around £4k a year until you die (if you've worked for more than one employer you will receive a pension from each of them).
DB pension schemes are usually linked to inflation, which means the amount you receive each year will increase in line with the cost of living. The important thing to remember with a DB scheme is that you will receive a secure income each year until you die and, in most cases, your boss will continue to pay your pension to your dependents (i.e. partner or children) after you die (for a set amount of time).
Like a DB pension scheme; Walter is reliable, he has a clear financial plan but he's old, stuck in his ways, and is dying a slow and painful death. And that's where Jesse comes in...
2. Defined contribution (DC) - unlike a DB scheme, which provides a guaranteed regular income, with a DC scheme you only get out what you put in. The way it works is you and your boss pay a certain amount of your wages into your pension pot each month. This money is then invested into a range of funds (i.e. stocks and bonds) to help your money grow - this means the money within your pension could go up or down depending on how your investments perform (you're able to choose what to invest in - but, if you don't feel comfortable doing this, there will also be a 'default' option, which your company would have chosen for you).
The key thing to remember here is that you are not guaranteed a set pension until you die and therefore you could run out of money if you don't budget wisely.
DC schemes are a lot more flexible than DB schemes as you can choose how to take your money when you retire:
Like a DC pension scheme; Jesse is far less reliable, he has plenty of ups and downs and he doesn't have a clear plan. But he's the heir to the Blue Sky (i.e. DB) throne and is left to tie up any loose ends in his own spin-off movie.
Anyway, I should probably stop the drug analogy there, since the hardest drug I've dabbled in is Calpol. But, the moral of the story is - if you're still entitled to a DB pension (which is likely to be the case if you work for the government) you should count your lucky stars because the rest of us are having to build up dinosaur accounts of our own with no guarantees.
To the Jesse's of the world - as depressing as it is, it's important to remember that when you retire, you will only get out what you and your employer have put in (plus any profits you've made on your investments), so unless you want to live off tinned soup for the rest of your life - I'd recommend taking your pension seriously no matter how far off retirement seems.
If you're not sure how much you should be saving - don't worry - I'll cover this in my next blog!
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