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Pensions.
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When it comes to providing for our retirement, too many of us are doing too little, too late. Putting away even a small sum early on can make a big difference to the lifestyle you will enjoy when you retire.
The golden rule for most people, is to not rely on the State alone. Modern pensions benefit from some significant tax breaks. You can even contribute to your pension if you are not working!
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Legislation surrounding pension contributions and pensions in retirement is currently under review by the government. Major changes are anticipated in the coming months and you should always check with an adviser to ensure you have the latest information.
In April 2006, the government simplified the pension contribution process. Previously, your contributions would have been limited to a percentage of your earnings, but now there’s one rule for all, which is of particular assistance to people in the 20 to 40 age bracket that may have put off investing in a pension. These groups can now put in larger sums later, instead of saving modestly, without being penalised for doing so. Remember, however, that the benefits of saving early can be substantial.
There are limits to how much you can save into a pension over the course of a year and during your lifetime. There are a number of changes that are likely to be made to these limits in the coming years and it is best to check with your financial adviser in order to ensure you will not breach any of these limits.
Personal Pension Plans (PPPs)
Personal Pension Plans (PPPs) were originally designed for the millions of employed & self-employed individuals who did not have access to a company pension scheme.
Introduced in July 1988, they were part of a government push to extend pension choice & encourage those people not in company schemes to build up a retirement fund; one that could cater for their retirement needs more realistically than the state. Many financial institutions offer PPPs, though most are run by the large insurance companies and banks.
Using sophisticated research and analysis tools, Investment Solutions can compare the whole market on your behalf to find a suitable pension plan, it may be that a PPP meets your needs for retirement provision.
Unlike some company schemes, all personal pensions work on a ‘money purchase’ basis. This means that the money you save each month or each year into your Personal pension plan is invested (typically in investment funds) and is then used at retirement to provide you with pension benefits. So in theory the more you save the better your pension should be at retirement.
On reaching retirement, you use the money that has built up in your personal pension to purchase pension benefits, these benefits can be taken in the form of either income or income with a tax free lump sum (The Pension Commencement Lump Sum). Or the benefits can be transferred to another type of plan which provides unsecured pension benefits (see section on Income Drawdown / Pension Fund Withdrawal), these types of plan allow additional flexibility in that pension benefits can be drawn whilst your pension fund remains invested.
The value of your pension at retirement is mainly dependent upon:
• How much money you've paid in over the life of the plan
• How well the money has grown
• The annuity rate that the provider applies to your pension fund (if you choose to take an annuity)
• Level of Pension Commencement Lump Sum taken. (Up to a maximum of 25% of your pension fund can be drawn as capital)
• The charging structure of the plan
So a Personal Pension Plan is really just a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement. At retirement provision can be made to protect your pension from the eroding effects of inflation, protect your income in the event of your death and make provision for your spouse or dependants. Benefits can currently be drawn from age 55 onwards.
Self Invested Personal Pension Plans (SIPPs)
A Self-Invested Personal Pension is the name given to the type of UK government approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of HM Revenue & Customs (HMRC) approved investments. This means a SIPP can provide far greater control over the investment of your pension money which typically might previously only have been invested in a limited range of insured funds.
SIPPs are a type of Personal Pension Plan. The HMRC rules allow for a greater range of investments to be held than Personal Pension Plans, notably, stocks & shares, unit trusts, investment trusts, managed investment funds and property. Rules for contributions, benefit withdrawal etc are the same as for other personal pension schemes.
Stakeholder Pension Plans (SHPs)
A Stakeholder pension is a form of low cost Personal pension aimed at encouraging those people who do not currently have pension provision to save for their retirement. They became available on 6th April 2001.
In order to reach as wide an audience as possible, Stakeholder pension schemes are intended to be flexible and easy to understand. Employers with 5 or more employees have had an obligation to provide their employees with access to a stakeholder pension scheme since 8th October 2001, although it is not compulsory to save for retirement with a Stakeholder Pension plan or any other savings related product.
Stakeholder Pension plans are very similar to Personal Pension plans; they are individual pension arrangements, meaning that they are personal and portable - you can take them with you if you change jobs.
An important aspect of the ‘no penalties’ rule in relation to these types of pension plan is that you don’t have to delay starting a plan until you find the right provider. You can start a plan straight away. If the provider doesn’t perform as well as you expect, you can simply take your fund and transfer it to another provider, without penalty. Another big plus for Stakeholder pensions is that providers must allow a minimum premium of £20. This provides much needed flexibility compared to other Pension contracts where minimum premiums may be higher; furthermore there is flexibility to stop and start contributions with unlimited frequency.
Company Pensions
Employers' pension schemes, Superannuation, Occupational schemes - defined benefit schemes / defined contribution schemes, Company pensions....... all refer to Employer related pension schemes.
A good proportion of the UK’s working population are members of a company pension scheme. Occupational pension schemes are those run by your current or former employers. These come in two basic types: defined benefit, where the benefits paid in retirement may be based on a combination of your age, length of service and the pensionable salary you are paid just before you retire - your final salary or; defined contribution, also known as money purchase, which will pay out an amount based on the size of the fund into which your contributions have been invested.
Group Personal Pensions are becoming more popular with employers, these are low cost personal pension plans bought by groups of employees under the auspices of their employer. The latter are personal pension schemes organised as a group to share lower costs of administration.
Your employer may make a contribution to your occupational pension scheme in addition to deducting a percentage of your salary and paying it into the scheme. You may make extra contributions to your occupational scheme to boost your pension provision.
Eligibility to join a company scheme varies form company to company. Some allow their employees to join either straight away or very soon after joining the company, whilst others put in place conditions before an employee can join, such as a minimum 2 years of service, or upon reaching a certain age.