Simplification is the key - Centre for Policy Studies

Cash ISA
Collective
Investment
Scheme (CIS)
Defined Benefit
(DB)
occupational
pension
schemes
Defined
Contribution (DC)
occupational
pension
schemes
Guarantee Credit
Cash ISAs can be invested in National Savings, Cash Unit Trusts, UK and European
bank deposits and building society deposits.
Up to £3,600 can be invested in a Cash ISA (2009-10 tax year; £5,100 for the over-
50’s), and £5,100 for those aged 16 and over from April 6th 2010.
A CIS is an arrangement that enables a number of investors to 'pool' their assets
and have these professionally managed by an independent manager. Investments
may typically include gilts, bonds and quoted equities but, depending, on the type
of scheme may go wider. For example some investments may be in unquoted
investments or property. Investors in such schemes are able to reduce risk by
spreading their investments more widely than may have been possible if they were
investing in the assets directly. The reduction in risk is achieved because the wide
range of investments in a collective investment scheme reduces the effect that
any one investment can have on the overall performance of the portfolio.
DB, or final salary, pension schemes entitle employee members to pension
benefits defined by a formula linked to their length of pensionable service and
salary when they leave the scheme. Employees are typically provided with 1/60 of
final salary for each year of service up to a maximum of 40/60, i.e. two thirds of
final salary. At retirement a tax-free lump sum may be taken at the expense of a
reduced pension. DB pension promises are unrelated to the contributions made to
the underlying fund.
Many schemes now face large deficits as liabilities (due to such factors as
increased longevity) have outgrown the funds' assets. Consequently, many
sponsors, struggling to meet their statutory funding requirement and deterred by
the increase in company accounts volatility (care of accounting standard FRS 17),
are closing their DB schemes in favour of (less costly) DC schemes.
DC, or money-purchase, schemes are pension schemes into which an employer
pays a regular contribution, fixed as an amount or percentage of the employee's
pay. The employee may also make contributions into the scheme. Contributions
are invested to provide employee retirement benefits, with investment risk and
investment rewards assumed by each employee/retiree, and not by the
sponsor/employer.
Employers increasingly favour DC schemes over DB schemes because they cost
less to run and result in a predictable cash outflow. The "cost" of a DC scheme is
readily calculated, but the benefits are dependent upon the amount of
contributions and investment performance. Consequently, participants bear the
risk of outliving their assets. This risk can be mitigated by using accumulated
savings to purchase an annuity upon retirement (a legal requirement before
reaching 75), to provide a regular income until death. Although DC scheme
participants typically have control over investment decisions, the sponsor retains a
significant degree of fiduciary responsibility over investment of plan assets,
including the selection of investment options and administrative providers.
This guarantees anyone over 60 an income of at least £130 per week if single,
£198.45 for couples. Thus, a single person with weekly income of £90 would
receive Guarantee Credit of £40. “Income” is defined as including basic State
Pension and State Second Pension payments, some state benefits, private
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