Pension
The state old age pension could be pretty much the prospect that awaits you unless you make additional pension provision either by setting up a personal pension, alternative investment plan(s) or by being part of your employer’s company scheme.
There are a number of government pension schemes that could provide some income at retirement although some of these may or may not be relevant to your personal circumstances. The range available includes basic old age pension (OAP), graduated pension (ceased in 1978) and state second pension (S2P). The relevance of these to you will normally depend on your age, employment status and national insurance contribution record. On top of government pensions, there are then a range of personal arrangements which can be used to boost your income in retirement although this is not necessarily a must.
Let’s explore the range of options available.
Occupational schemes
Employer’s set up pension schemes for the benefit of their staff. They can be “final salary” or “defined benefit” schemes. These are schemes are governed by Inland Revenue rules and usually, a Trust is set up for the protection of members of the scheme. Money is normally paid in from the company, the members or both. The money is then invested.
Members get benefits in accordance with the rules of the scheme (typically a percentage of the final salary for each year that they have worked for the employer and made contributions into the scheme). These are expressed as a pound (£) pension value.
The fund is usually monitored by an appointed Actuary, whose job is to determine whether or not there will be sufficient assets to meet the pension payments, also known as pension liabilities. If the fund is doing well, the company, and in theory even the employees, might be able to reduce or stop their contributions for some time. If the scheme does badly, for example if the value of the underlying assets fall in value, then the company will be expected to make up any shortfall.
Alternatively, an employer may set up a "Defined Contribution" also known as "Money Purchase" scheme. In this case the monthly contributions are invested into a fund(s) earmarked for that particular employee who, when he or she retires, is able to take a tax free cash sum and use the balance to purchase an income known as an "Annuity." The range of Money purchase schemes available on the market includes Group Personal Pension Plan, Small Self Administered Schemes (SSAS), Funded Unapproved Retirement Benefit Schemes (FURBS), Executive Pension Plan (EPP), Contracted Out Money Purchase Schemes (COMPS) and Contracted In Money Purchase Schemes (CIMPS). Each of these schemes is governed by specific Inland Revenue rules. It is therefore vital that you seek expert advice as how appropriate they may be for your personal circumstances.
Annuities are offered by most pension providers and insurance companies and they guarantee the policyholder also known as Annuitant an income for the rest of their lives. There are different types of annuities on the market. It is now also possible to draw on-going incomes from a pension fund without purchasing an immediate annuity. Such an alternative arrangement is known as an Unsecured Pension.
Personal pensions
Where an employer’s scheme is not available, many employees (or the self employed) would set up personal pensions of their own. It has also been know that some employees express a preference for setting up their own personal pension instead of joining an employer’s pension scheme. Careful considerations should be given before such a decision is made. An experienced Independent Financial Adviser could assist in assessing all of the relevant factors and make a balanced recommendation.
The benefits from pensions can, for most people, be started at any time between the ages 50 and 75 (55 and 75 from 6th April 2010). The range of product options available in which to build up these benefits includes Personal Pension Plans, Self Invested Personal Pension Plans, Stakeholder Pension Plans, Additional Voluntary Contributions and Free Standing Additional Voluntary Contributions. There are also plans to allow you to transfer between different types of pension to enable your retirement provision to continue to match your needs.
One of the excellent attractions of pension schemes as a method of saving for retirement is that the Inland Revenue offers generous tax incentives within certain limits by way of tax relief on contributions. Tax relief is given at the highest rate of income tax that the individual pays on their income i.e.22% or 40%. It is also in many cases possible for individuals who don’t earn enough money to pay tax to make contributions into personal pensions and enjoy basic rate income tax relief on such contributions.
Stakeholder Pension is the “odd” one out of the range of personal pension plans available in that it was introduced by the current Government in 2001 as a low-cost and flexible way of saving for retirement, especially for those on lower incomes (even those not working), to set aside funds for their retirement and make them less reliant on the state for financial comfort.
The key to making the most of Stakeholder pension, as with other pension arrangements, is to start contributing as early as possible and maintain contributions for as long as possible as that way you give yourself a greater chance of building up a larger pension pot and in turn enjoy some financial comfort when you retire.
Armed with this basic information which is designed to begin to guide you through the complexities of pensions, are you now willing to ask the experts for guidance as to the full details, contribution limits, flexibility, tax implications, range of investment funds and what is most appropriate for your situation? If so, contact us NOW!
Whilst a pension may not be the be all and end all of your personal financial security arrangements, putting one in place is an important financial planning decision which should not be delayed. Even if retirement seems a long way off right now, just think of what life would be like if a state pension of the equivalent of £100 a week is all you had to live on.
Legal disclaimer
These pages provide generic information about various aspects of financial services advice that we provide as well as possible areas of clients’ financial planning needs. We hope they are helpful to you but they do not, on their own, add up to proper investment advice and we cannot take responsibility for anything you do in reliance on them without further discussion with us. Please do not make a decision based upon the information contained within these pages alone. They are not detailed or comprehensive enough to enable you to make an informed decision which is tailored to your circumstances and needs. Please contact us now for tailored advice.