According to research from fund management group, Fidelity International, many Britons hoping for a comfortable income at retirement could find themselves working until they are almost 80 years of age.

Workers relying on company pensions, linked to stock market growth, also known as defined contribution plans, need to significantly top up their pension, with an additional 8 per cent of their salary each year, if they wish to retire at the standard age of 65, according to Fidelity.

It is acknowledged by industry commentators that a comfortable income in retirement equates to two thirds of your previous final salary during employment. But while many retirees do get by on much less, they can be significantly worse placed to cope with rising costs, such as fuel bills or long term care.

Ethical money

More and more people are taking an interest in green and ethical issues according to the Investment Management Association, covering subjects as diverse as environmental improvement, climate change, genetically modified foods, gambling and the destruction of rain forests. Nowadays, you can choose to actively support or avoid these causes through everyday activities such as buying organic food, donating to particular charities or using recycled products. There are also increasing opportunities to make ethical choices when it comes to your finances.

If you are worried that the companies in which you invest might be exploiting Third World countries or damaging the environment, or if you have concerns that you may be supporting company activities that you don’t approve of, you may be interested in ethical investment, also known as Socially Responsible Investment (SRI).

Different people have different principles and not all ethical investment funds have the same objectives. Some look to invest in companies that make a positive contribution, while others specifically avoid certain companies. Ethical investors may avoid companies involved in activities believed to be harmful, such as tobacco production and pornography, whilst others may wish to support companies which make positive contributions to society, by being environmentally friendly for example. There are also ethical investment strategies which try to balance both the avoidance of some activities whilst pro-actively supporting others.

Some ethical funds go further still by using shareholder pressure to bring about changes in company policy. By joining forces with other investors a number of ethical funds have successfully influenced several companies to change their practices.

Ethical investment funds use a screening process to ensure that the companies they invest in are the right ones to meet their ethical policy. The screening will remove companies considered to be ‘negative’ and will encourage investment in ‘positive’ companies.

The type of screening used by the fund manager will be very important to you if you are particularly concerned about certain issues. You may wish to support certain companies that you feel are making a positive effort to be ‘green’ while avoiding those involved in activities that you do not agree with. Positive and negative screening will help you make your investment choice.

Many ethical investment funds will have a panel or committee responsible for setting the criteria and establishing an approved list of companies from which the portfolio manager can select investments. EIRIS, the UK’s leading independent provider of research into the ethical status of companies, also helps ethical funds with the ongoing monitoring of investments.

The first step when choosing an investment is to pick one which is appropriate for your objectives and attitude to risk. Once you have chosen a suitable type of investment you can then select a fund. Ethical investment is about personal choice. Do you want to avoid investing in companies involved in activities you dislike? Or do you want to support firms that have a positive impact on society? Remember some funds will combine both approaches.

Each fund should state clearly its exclusions and inclusions. Remember some funds will be ‘greener’ than others.

As a fund aims to please a lot of people, you may not find one that precisely mirrors your objectives but there should be several that are close.

As with most investment funds, the value of your investment depends on the type of investment fund you choose. Some funds are more risky than others. Ethical funds tend to hold a higher percentage of shares in small to medium sized companies and a smaller percentage in larger companies than their non-ethical equivalents.

Shares in small companies can sometimes be more volatile than those of larger companies. For this reason ethical funds are often perceived as being a riskier investment than their non-ethical counterparts.  However, as with all equity funds, the price of units can go down as well as up and there is always risk in the short term, so you should be looking to invest for the long term, 10 years or more.  Investing ethically does not necessarily lead to poor performance. The performance of ethical funds is just as reliant on good management techniques as that of conventional funds.

Funds with a strict criteria, also known as ‘dark green’, may be limiting their performance. For example, strict ethical screening can exclude whole industry sectors from investment. This can mean that you may miss out on the gains from this sector during periods of high growth. Some funds adopt a ‘best of sector’ or ‘light green’ approach. These funds may invest in larger companies often shunned by traditional ethical funds. This removes some of the risk associated with investing mainly in smaller companies. It is important to achieve a balance between your ethical and investment objectives.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

The jargon of retirement

Additional State Pension
The earnings-related part of the State Pension built up in the State Second Pension and/or the State Earnings Related Pension Scheme (SERPS).

Additional Voluntary Contributions (AVCs)
Employee contributions payable to a salary related occupational scheme that are over and above the normal contributions required by the scheme rules. This can be a useful way for people to get additional benefits from their occupational scheme.

Purchased with an individual pension pot built up in a money purchase arrangement to provide a pension that is usually payable for life.

Property or resources which have a monetary value.

Appropriate personal / stakeholder pension
This is a term used to describe a personal pension or stakeholder pension that is contracted out.

Basic State Pension
The flat rate part of the State Pension that is paid to everyone who has enough qualifying years through having paid or been treated as having paid or been credited with National Insurance (NI) contributions.

Usually used to describe a person entitled to benefit under a pension scheme.

In general, ‘Bonds’ fall into two main categories.

‘Fixed-interest securities’ are investment vehicles issued by public companies, local authorities, government and also private companies (corporate bonds) which carry a fixed rate of interest normally payable over a specified period. UK Government fixed interest securities are called ‘gilts’ and can be bought and sold on the market. Their value generally rises when interest rates are low and falls when interest rates are high. Corporate bonds tend to pay a higher rate of interest than those issued by public bodies because of the higher risk of default.

‘Index-linked securities’ were devised specifically for pension schemes and were first introduced in the UK in 1981. The index link refers to the amount of capital invested and a fixed rate of interest is also payable on the current capital value and so is itself indexed.

Combined Pension Forecast
Provides members of private pension schemes with an estimate of how much they are likely to get from both their State and their current private pension.

Contracted out
Someone is contracted out if they join a pension scheme that provides benefits in place of the State Second Pension (formerly SERPS).

Contracted-out rights
Rights held in a pension fund that derive mainly from the National Insurance (NI) contribution rebate and its investment return.

Contracted in
Any private pension scheme that provides benefits in addition to, and not replacing, the State Second Pension (formerly SERPS) is commonly referred to as being “contracted in.”

Controlling director
A director, who on his own or with associates, owns or controls 20 per cent or more of the ordinary shares of the employing company or has done so at any time after 16 March 1987 and within ten years of retirement or leaving service or Pensionable service. Special restrictions apply to controlling directors who are members of approved schemes.

Defined benefit scheme
A scheme that provides benefits that are usually related to the scheme member’s salary rather than how much is paid into the scheme and how well the payment has been invested.

Defined contribution scheme
See Money-purchase scheme.

Earnings threshold
This is an amount of earnings stipulated within certain tax rules that allow you to invest more than £3,600 in a personal pension if you meet other requirements relating to your age and your earnings.

Employment and Support Allowance
From 27 October 2008 Employment and Support Allowance (ESA) replaces Incapacity Benefit and Income Support.

Employment service
The length of time you have worked for an employer. This is not to be confused with Pensionable service.

Equities are investments in a stock exchange listed company, where the value of the investment (shares) is dependent upon the performance of the company and the general state of the stock market. They also, normally, generate income through the payment of dividends. Equities held in UK pension funds generally fall into two categories, those listed on the London Stock Exchange (UK equities) and those listed on a foreign stock exchange (overseas equities).

Final salary scheme
A type of Defined benefit scheme where the pension payable is based on the length of time that someone has been a member of the scheme and his or her earnings in the final years leading to retirement.

Free-standing Additional Voluntary Contribution (FSAVCs)
Employee contributions that are made to a pension provider under the terms of an existing occupational pension contract but are entirely separate from the occupational pension scheme.

Financial Services Authority (FSA)
An independent non-governmental body that regulates the financial services industry, promotes understanding of the UK’s financial systems and helps protect consumers.

Group personal pension scheme
An arrangement with a personal pension provider that allows a group of individuals to take out a personal pension on a group basis. They are usually set up by an employer on behalf of its employees but can also be set up by a group of self-employed individuals. The main advantage of such an arrangement is that it can result in the scheme making lower administration charges.

Home Responsibilities Protection (HRP)
This helps protect a person’s entitlement to the basic State Pension if they are unable to undertake regular employment due to caring for a child/children or a sick or disabled person at home. It may also help a person qualify for additional State Pension, via the State Second Pension. From April 2010, HRP will be replaced by a system of credits for parents and carers and periods of HRP awarded before 2010 will be converted to credits for people reaching SPA after this date.

Hybrid scheme
See Mixed benefit scheme.

Incapacity Benefit
Paid if Statutory Sick pay (SSP) has ended, or if you cannot get SSP. Incapacity Benefit is not paid if you are over State Pension Age when you became sick. From 27 October 2008 Employment and Support Allowance replaced Incapacity Benefit for new customers only.

Lower Earnings Limit 
The minimum amount that someone must earn in a tax year in order to build up entitlement to State benefits, including Incapacity Benefit, and Employment and Support Allowance, Jobseeker’s Allowance and State Pension. The Lower Earnings limit for 2009/10 is: Weekly £95.00 and Monthly £412.00.

A person who has joined a pension scheme and is entitled to benefit under the scheme.

Mixed benefit scheme
A type of hybrid scheme that allows an employer to run a salary-related and money-purchase section under the same scheme.

Money-purchase scheme
A private pension scheme providing benefits on a money-purchase basis, with the exception of death benefits. The amount payable is based upon the amount paid in and how well that money has been invested.

National Insurance (NI) contributions
Regular payments to the State to help build up entitlement to benefits including Jobseeker’s Allowance, Incapacity Benefit and State Pension.

Normal Retirement Age
The earliest age at which a member of an occupational pension scheme can be paid a pension without a reduction in benefits.

Occupational pension scheme
A type of private pension scheme run by some employers to provide a pension for their employees. Sometimes referred to as a works pension, a company pension or superannuation scheme.

Occupational pension scheme managers
The people responsible for ensuring that occupational pension schemes operate effectively and within the law.

Occupational pension scheme trustees
The people who represent the interests of scheme members. They must act independently from the employer. Where one of the trustees is also the employer, the trustee duties and the responsibilities arising from the role as employer must be kept separate.

Regular payments from a pension scheme run by the State, a former employer or private financial company, that are usually payable for life.

Pension Credit
Pension Credit is an income-related benefit for people aged 60 or over living in Great Britain that provides, or contributes to, a guaranteed level of income. It also means that for the first time, people aged 65 and over will be rewarded for some of their savings and income they have for their retirement.

Pension Protection Fund
Will compensate members of eligible defined benefit schemes when there is a qualifying insolvency event in relation to the employer and there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.

Pension scheme
A type of savings account set up to provide an income in retirement.

The Pensions Advisory Service
OPAS is a voluntary independent organisation that provides information about occupational pensions, personal pensions and stakeholder pensions.

The Pension Service
Part of the Department for Work and Pensions (DWP), which provides information about State pensions to both existing and future pensioners.

Pensionable service
The length of time that someone has been a member of a pension scheme. This is not to be confused with Employment service.

A person who is claiming or receiving money from his pension scheme.

The Pensions Regulator
The Pensions Act 2004 introduced a new independent body, The Pensions Regulator, to help protect members of occupational pension schemes by focusing on those schemes it considers to be at most risk from either fraud or poor management and administration. The Pensions Regulator replaced the Occupational Pensions Regulatory Authority from April 2005.

Personal pension scheme
A type of private pension scheme, including a stakeholder pension scheme, run by banks, investment companies and building societies.

Private pension scheme
This can be a personal pension scheme, including a stakeholder pension, or an occupational pension scheme.

Qualifying year
A tax year in which you have sufficient earnings upon which you have paid, are treated as having paid or have been credited with, National Insurance contributions.

Retirement age
This is the age when you choose to leave work. It can also be used in reference to the Normal Retirement Age stated under certain private pension schemes, which relates to when you can start collecting your private pension. It is not necessarily the same as your State Pension age.

The State Earnings Related Pension Scheme reformed by the State Second Pension in 2002.

Stakeholder pension scheme
A type of personal pension scheme that has to meet minimum standards set down in law. Stakeholder pensions are flexible and portable with a cap on annual management charges.

State Pension
The pension payable by the State, which is based on an individual’s National Insurance contribution record. See additional State Pension and basic State Pension.

State Pension age
The earliest age at which someone can receive the State Pension.

State Pension deferral
A term used to describe the decision to put off claiming the State Pension. People who do this may receive a higher State Pension or a one-off taxable lump sum payment.

State Pension forecast
The State Pension forecast gives details of State Pension already built up and the amount that someone is likely to get at State Pension age.

State Second Pension
The additional State Pension which reformed the State Earnings Related Pension Scheme (SERPS) pension in April 2002 to provide a more generous pension for low and moderate earners.

Tax relief
Generally, contributions payable to a pension scheme that is approved by the HM Revenue & Customs for tax purposes, are not subject to Income Tax.

A type of personal pension where contributions are used to buy shares in funds chosen from a wide range of investments. The value of these investments can fall as well as rise but over the longer period they may offer higher returns. Costs are normally deducted from the fund.

War Disablement Pension
A pension for people who have been injured or disabled during wartime, or as a result of their service in Her Majesty’s Armed Forces, subject to certain conditions.

War Widow’s/Widower’s Pension
A pension for people whose husband’s, wife’s or surviving civil partner’s death was caused by, or happened sooner because of, service in Her Majesty’s Armed Forces.

Source: The Pension Service