If there’s one thing everyone's agreed on, it’s that pensions are confusing.

But they're important too. The Employee Pension Scheme is one of the pillars of our retirement income, whilst occupational and personal pensions are a key vehicle for long-term savings.

While it’s essential that we get to grips with pensions, we needn't go to the other extreme. Pensions should only be one part of an overall long-term investment plan. Balancing your investments is crucial as it helps to manage risk.

However, it's good to remember that your pension contributions are tax efficient. All growth within the pension is also tax efficient. And, of course, pensions keep your money out of temptation's way until you retire. The downside is that you'll have to pay tax on your pension income.

Here's an overview of the types of pension you might encounter – how they work, who's actually paying for them, and how you'll get your money when you retire.

Employee Pension Scheme This Scheme is available only for those who are employed and coming under the provisions of Employees' Provident Funds and Miscellaneous Provisions Act, 1952

If you are in one such employment you are automatically a member of Employee Pension Scheme (EPS) operated by the Employees' Provident Fund Organisation (EPFO), India .

How your benefit is calculated under EPS?

Assume that you are a EPF member after 15 th November 1995, the formula of calculation of pension is (Average Salary * Service / 70)

The maximum service for the calculation of service is 35 years. So if you retire with maximum service, your pension will be (Average Salary / 2)

Now the Average Salary is the pensionable salary and not the actual salary you were receiving before retirement.

The pensionable salary is limited to Rs.6,500.  

Going by the above benefit description, even if you were actually earning Rs.20,000 per month, your EPS pension will only be Rs.6,500 divided by 2, that is, Rs.3,250  

The basic Employee Pension Scheme may not amount to much, but it is one of the pillars of our retirement income.  

Let's look at some of the other options.

Occupational pensions

You may well have an occupational pension. Not all the Employers offer such schemes. Even if they offer, the scheme will be limited only to a particular section of the employees.

They come in two varieties: the defined benefit pension (usually a final salary pension) and the defined contribution pension.

For employees, a final salary pension is the most attractive scheme around. That's because how the level of your pension will be worked out is 'defined' in advance. What's more, employers are the ones making the investment decisions and taking the investment risk.

How it works is that the employer makes provisions for your pension and you contribute a set percentage (some schemes may not even need you to contribute). When you retire you'll generally have the option of taking a tax-free lump sum and will receive a retirement income, usually based on a percentage of your final salary, which depends on the number of years you've been in the pension scheme.

This income is worked out by a simple calculation. For example, a scheme might offer 1/60th of your final salary multiplied by the number of years you've been working there. Therefore, if you've been in a defined benefits scheme for 20 years and your salary when you retired was Rs.30,000, then your pension income from the scheme would be: Rs.500 (that is, 1/60th of Rs.30,000) x 20 (years) = Rs.10,000.

Not all schemes are the same. Some will offer different levels of benefits, such as a lower multiplier of 1/80th or less. In some circumstances, some schemes may be able to reduce what they offer – for instance, if you decide to take the benefits before the agreed retirement date. It all depends on the scheme.

Bottom line: if you are eligible to join a final salary pension scheme, you should seriously consider it. But first, you should take financial advice and check the benefits offered by the scheme and how much you are required to contribute.

Final salary pensions are becoming rarer, and a number of companies are closing their schemes to new recruits. Companies are increasingly looking to push more of the risk involved in providing pensions on to their employees. This means that you're more likely to come across a defined contribution pension scheme.

Unlike with final salary pensions, this doesn't set out in advance how your pension will be calculated when you retire. What you get will depend on how much you (or you and your employer) have contributed and how successfully you've invested it. Crucially, you're the one taking the risk, not your employer.

How it works is that you make contributions throughout your working life and your employer may contribute too. This money is invested in a fund for you.

With occupational pensions, you can choose to top up your contributions. These top-ups are called AVCs (additional voluntary contributions). With defined contribution pensions AVCs, what you're generally doing is increasing your contributions. However, some final salary schemes will only allow AVCs to be invested to provide benefits in the same way as a defined contribution scheme.

Of course, these days most people don't stay with one company all their working life. You're likely to have lots of little bits of pensions all over the place, making it even harder to get a handle on how much you've already saved.

It is possible to move one pension into another one but this may lead to transfer charges. This is an area where you should seek financial advice.

Personal pensions

Personal pensions are ones you arrange yourself. These are individual deferred annuity policies offered by Insurance companies. They come in guaranteed traditional type, or under with-profit type and also in unit linked versions.

So there you have it

This is just a broad overview. But here are a few things to take away.

• There is no state pension except pension under Employee Pension Scheme (EPS), if you are employed.
• The pension under EPS though a defined benefit may not be sufficient to maintain your standard of living
• Look into long-term savings
• Saving via a pension is tax efficient.
• If you are working for a company that makes any contribution at all to an occupational pension scheme, you should seriously consider enhancing the overall contributions by adding your own contribution
• Fill in the retirement planner so you have all your information gathered together in one, convenient place.
• Talk to a financial adviser about your own situation.

Employee Pension Scheme

A pension provided by the Employees' Provident Fund Organisation for its members.  

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Personal pension

A pension that you take responsibility for yourself.  

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Occupational pension

A company pension is a pension that's provided by your employer. There are different types of company pension, including defined contribution pensions, final salary pensions.

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Contributions

This refers to the amount you pay in to a pension every month. Your employer may make contributions to your pension too.

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Risk

Risk is the possibility that something negative will happen. In financial planning, the risk is you may not get the return you're looking for, or may even lose some of your investment. As a rule of thumb, higher-risk investments, such as shares, have a higher return than low-risk ones. High-risk investments are better suited to long-term savings as it gives you time to ride out the risk.

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Income

This is the money you have coming in, such as the interest that you're getting from your investments.

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Tax-free lump sum

A single amount of money that you don't have to pay tax on.

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