pensions

Saving for retirement is something that most of us put off for as long as we can. But the reality is that the sooner you start paying into a pension the better your income in retirement is likely to be.

Pensions are long-term investments with special tax rules – for example, contributions currently qualify for Income Tax relief at your highest rate.

You can't access the money in your pension until you reach age 50, going up to 55 by 2010. Some pension schemes have additional rules about when you can take your benefits – check with your scheme provider.

 

Contributions

There is no limit on the amount of contributions that can be paid. There is a limit on the amount which enjoys tax relief. The annual limit is the lower of one times salary or £235,000. There is no limit at all in the year in which benefits are taken in full. Those not earning or earning less than £3,600 per year, will be able to contribute up to £3,600 per annum. Based on tax year 2008/2009.

So let us help you find the pension which is right for you.

There are three main types of non-State pension. They are:-

  • Occupational salary-related schemes - offered by some employers;
  • Occupational defined contribution schemes (also called money purchase pensions) - offered by some employers; and
  • Stakeholder pensions and personal pensions - offered by some employers, or you can start one yourself. You may also be offered a group personal pension at work. These are also money purchase pensions.

 

What are the benefits?

It’s usually a good idea to join an occupational pension scheme if it’s available because:-

  • your employer normally contributes; and
  • often you also get other benefits, such as:
  • life insurance which pays a lump sum and/or pension to your dependants if you die while still in service;
  • a pension if you have to retire early because of ill-health; and pensions for your spouse and other dependants when you die.

 

The Personal Pension

A personal pension is one that you take out yourself, for example if you're self-employed or your employer doesn't offer a pension arrangement. They are a type of money purchase pension.

You choose the provider and make arrangements for your contributions to be paid. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from the range available from your provider.

How does it work?

The fund builds up using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:

Stage 1

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.

Stage 2

When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.

The amount of pension income you'll get will depend on:

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

 

Group personal pensions

Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income when you retire. They are a type of money purchase pension. The scheme is run by the pension provider that your employer chooses, but it is an individual contract between you and the provider. The provider claims tax relief at the basic rate and adds it to your fund. If you are a higher-rate taxpayer, you will need to claim the additional rebate through your tax return.

How does it work?

The pension fund builds up using your contributions and, where they are made, your employer’s contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:

Stage 1

The pension fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.

Stage 2

When you retire, you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.

The amount of pension income you’ll get will depend on:

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments perform;
  • the charges taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

 

The Stakeholder Pension

These may be offered through some employers or you can start one yourself. Stakeholder pensions are money purchase pensions and must have certain features. Some of these are:

  • limited charges;
  • low minimum contributions;
  • flexible contributions;
  • penalty-free transfers;
  • a default investment fund – a fund your money will be invested in if you don't want to choose.

Stakeholder pensions at work

If one is offered through your employer, they will have chosen the pension provider and they may have arranged for contributions to be paid from your wages or salary. The employer may contribute to the scheme.

Your employer deducts contributions from your pay and sends them to the pension provider. The pension provider claims tax relief at the basic rate and adds it to your fund. If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return.

How does it work?

Money purchase pensions build up a pension fund using your contributions, investment returns and tax relief. It helps to think of money purchase pensions as having two stages:

Stage 1

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.

Stage 2

When you retire you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.

The amount of pension income you’ll get will depend on:

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

The amount of pension income you’ll get will depend on:

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

 

SIPPS Pensions

The self-invested personal pension (SIPP) itself is a pension wrapper that holds investments until you retire and start to draw a pension income.

SIPPs are designed for people who want to manage their own fund by dealing with, and switching, their investments when they choose. They may have higher charges than other personal pensions or stakeholder pensions. For these reasons, they are more suitable for large funds and for people who are experienced with investing.

With standard personal pension schemes, your investments are managed for you within the pooled fund you have chosen. SIPPs are a form of personal pension scheme that give you the freedom to choose and manage your own investments. Or you can employ and pay for an authorised investment manager to make the decisions for you.

Most SIPPs allow you to select from a range of assets, such as:

  • particular stocks and shares quoted on a recognised UK or overseas stock exchange;
  • government securities;
  • unit trusts;
  • investment trusts;
  • insurance company funds;
  • traded endowment policies;
  • deposit accounts with banks and building societies;
  • National Savings products; and
  • commercial property (such as offices, shops or factory premises).

This list is not exhaustive and different SIPP operators will offer different ranges of investment choices.

It’s unlikely that you will be able to invest directly in residential property within a SIPP. Residential property can’t be held directly in a SIPP with the tax advantages that usually accompany pension investments. But, subject to some conditions including restrictions on personal use, residential property may be held in a SIPP through collective investment vehicles, such as real estate investment trusts or property trusts, without losing the tax advantages. However, not all SIPP operators accept this type of investment. .

 

Annuities

An annuity is a contract between an insurance company and a pension scheme member under which the member hands over all or part of their pension fund to the insurance company which agrees to pay out an income to the scheme member for the remainder of that person's life. The annuity would normally be paid monthly, quarterly, half-yearly or annually.

If you have an Occupational Pension, your employers will normally arrange your annuity when you come to retire.

If you have a Personal Pension, your pension provider will contact you with an offer of an annuity. You do not have to accept their offer & can choose another insurance company to provide you with an annuity.

The amount of the annuity may stay the same throughout the years of payment or may have automatic annual increases built in. These increases may be at a fixed rate, e.g. 3% per year, or the rate of increase may vary, e.g. with the annual change in the Retail Price Index.

The annuity can be set up so that all or part of it reverts to your spouse or partner in the event of your death. Also they can be set up so that they are payable for a minimum period, say 5 or 10 years, even if you die before that period ends.

The value of the annuity is dependent on two factors – the size of the pot and the annuity rate offered by the insurance company selling the annuity.

Annuity rates are calculated by actuaries using various factors – mortality, interest rates, age, gender and sometimes health. In general terms, annuity rates are higher the older a person is because future life expectancy is less. In the same way men get higher annuity rates than women of the same age due to men having lower-life expectancy.

In addition, enhanced annuities are available to those who have a shortened life expectancy due to poor health. These are known as impaired life annuities.

 

Occupational salary-related schemes

Some employers offer these schemes. They are sometimes called final salary or defined benefit. This is because they usually provide a pension based on:-

  • the number of years you have been a member of the scheme (known as pensionable service);
  • your pensionable earnings (often averaged over the last three years before retirement); and
  • the proportion of those earnings you receive as a pension for each year of membership (called the accrual rate). The most common accrual rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service.

The scheme is run by trustees who look after scheme members’ interests and your employer contributes to the scheme.

Your employer is responsible for ensuring there is enough money at the time you retire to pay you the pension.

 

Occupational defined contribution schemes (money Purchase)

Some employers offer these schemes. They build up a personal fund for each employee which is converted into an income at retirement. They are a type of money purchase pension. The scheme is run by trustees who look after scheme members’ interests and the employer usually contributes to the scheme. The employer deducts your contributions from your salary before it is taxed.

How does it work?

Money purchase pensions build up a pension fund using your contributions and your employer’s contributions (if they make any) plus investment returns (if any) and tax relief. It helps to think of money purchase pensions as having two stages:

Stage 1

The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. Remember though that the value of investments may go up or down.

Stage 2

When you retire you can take a tax-free lump sum from your fund and use the rest to secure an income – usually in the form of a lifetime annuity.

The amount of pension income you’ll get will depend on:

  • how much you pay into the fund;
  • how much, if anything, your employer pays in;
  • how well your investments have performed;
  • what charges have been taken out of your fund by your pension provider;
  • how much you take as a tax-free lump sum;
  • annuity rates at the time you retire; and
  • the type of annuity you choose.

What you need to think about

Think carefully if you are planning not to join your employer's pension scheme. It is not usually a good idea to turn down a pension scheme to which your employer will contribute on your behalf.

The benefits of these schemes are that:

  • your pension benefits are linked to your salary while you are working, so they automatically increase as your pay rises;
  • your pension entitlement is not dependent on the performance of the stockmarket or other investments;

The pension scheme will normally increase your pension income each year in line with the Retail Prices Index (RPI) or a set percentage, whichever is the lower.

Risks in these schemes

Some salary-related occupational schemes have been in the news because the employer has become insolvent and there wasn't enough money in the employer's pension scheme to pay the pensions it had promised to its current and former employees.

The government set up a Pension Protection Fund in April 2005 to protect members of salary-related schemes. The fund pays some compensation to scheme members whose employers become insolvent and where the scheme does not have enough funds to pay members' benefits. The level of compensation may not be the full amount.

THE INCOME FROM PENSION MAY NOT BE FIXED AND CAN GO UP OR DOWN.

WE DO NOT ADVISE ON OCCUPATIONAL SCHEMES, HOWEVER WE CAN REFER YOU TO AN AUTHORISED ADVISER.