Key Features of a Pension

Now that you have thought about:

• what monthly income you need to cover your basic and luxury needs, and
• the important risks you face in retirement,

the next step is to understand the key features of the different types of pension that are available to you when you retire. The following five key features should be considered in assessing the type of pension to be secured on retirement:

• Choice
• The degree of investment expertise you must have to manage your pension
• Security
• Inheritability
• Cost structure

These five features are described in more detail below – think about them carefully, because next you will be asked to consider which feature you value most highly.

Choice

“Choice” means that you can choose each year the amount of income you receive and also how your money is invested. It also means that you have some flexibility to change your pension according to your needs every year.

A high rating for this feature indicates that you attach a lot of value to choice.

The investment expertise you must have to manage your pension

Some types of pension require you to have a great deal of insight into investing and managing your money – you have to take responsibility for how the money is invested (even if you are helped by a financial advisor).

A high rating for this feature indicates that you rate your investment skills and competence highly and will therefore attach a great deal of value to this feature.

Security

“Security” means the extent to which your monthly pension is certain to be paid.

A high rating for this feature indicates that it is important for you to have “peace of mind” with respect to your pension.

Inheritability

“Inheritability” means the extent to which your dependants will benefit from your pension after you die. A narrow form of inheritability is when only the people who are directly financially dependent on you (e.g. your spouse) continue receiving a pension when you die. With most types of pension, it is fairly easy to make provision for your spouse and others who may be directly dependent on you.

A broader form of inheritability is when even people that are not financially dependent on you (e.g. your adult children) benefit from your retirement savings after you and your spouse have died.

A high rating for this feature indicates that you attach a high value to the broader form of inheritability.

Costs associated with the pension

Different forms of pension have higher associated cost structures. Higher costs are not necessarily bad, but you need to be confident that you will receive adequate value for these higher costs. A high rating for this feature indicates that you want to keep the costs associated with the pension as low as possible.

The Fund's rating of a life annuity against these features

The rating is somewhat subjective so you should not be concerned if your rating is 1 point higher or lower than the Fund's. On the other hand, if your rating for a feature is much higher or lower than the Fund's, then you should revisit your understanding of a life annuity.

Feature of a life annuity	Our rating	Reason for our rating
Choice	1	You only have choices at the start of the pension
You must have a high degree of investment expertise	0	Insurer makes all the investment decisions
Security	4	The current pension is guaranteed by the insurance company paying the pension. Future increases may or may not be guaranteed.
Inheritability	2	Your surviving spouse continues to receive a pension after your death.
Low cost structure	4	This is generally a cheap form of pension

These ratings will be used later in this section, under the heading “Which pension best meets your needs?”