The main sources of retirement income fall into four types:
For people who have worked and paid sufficient relevant National
Insurance contributions, there is the basic
state pension. The basic state retirement pension or 'old age pension' as
it is commonly known is not really sufficient to provide anyone with a comfortable
retirement. For a single person the basic state pension is presently at £75.50
per week (from April 2002).
Additional state pension arrangements
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SERPS
- State Earnings Related Pension Scheme |
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Until April 2002 only employed
persons paying sufficient National Insurance Contributions qualified for
SERPS. On 6th April 2002 the State Second Pension (S2P) replaced SERPS
with any existing SERPS entitlement being protected. |
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S2P
- State Second Pension |
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The S2P is intended to provide a more generous
state pension for people on low or moderate earnings and for carers and
people with a long term illness or disability. Like SERPS, the self-employed
will not be entitled to S2P benefits at retirement. |
Occupational Pension
An occupational pension scheme is a pension which may be offered by an employer.
Some schemes do not require you to contribute, others do. Under current rules
you do not have to join your employer's pension scheme (this is under review
by the Government) but as the employer will be responsible for many of the costs
associated with setting up a plan, it is usually advisable.
If you join your employer's approved occupational pension scheme, he must
contribute as well. Many occupational pension schemes offer additional benefits
such as life cover, which may be worth up to four times your salary.
Life assurance pays a lump sum to your dependants were you to die before retirement
and is included in many employer schemes, often complemented by a pension for
your widow/er or other dependants. The possibility of retiring early may be an
option, but this will normally be on a reduced pension. Both 'final salary' and
'money purchase
schemes' are types of 'occupational' schemes.
The pension is taxable when it is paid, but may be linked to inflation and thus
increase annually once you start receiving it. Many schemes also pay out a lump
sum, which is currently tax-free, when you retire.
A 'final salary'
scheme gives the members a commitment to pay them a pre-defined proportion of
their final salary upon retirement (a 'defined benefit'). This depends on a number
of factors, such as the time you have worked for the employer, the time you have
belonged to the scheme and your earnings in the period just before you retire.
For example, you may receive 1/60th of your final salary for each full year you
work for your employer and are a member of the scheme.
With a money purchase
scheme your contributions are invested for you into a specific share of the
pension fund. A fixed rate of contribution is set, usually a percentage of salary.
Contributions continue as long as an employee remains a member of the scheme.
The contributions are invested by the trustees of the scheme with the aim of
increasing over the years by the addition of interest, bonuses, growth of unit
prices, etc - depending on the way the money is invested. The fund built up for
each individual employee is then used to provide a pension and other retirement
benefits at pension age.
The level of retirement pension depends on the total amount paid into the scheme
for each employee, the investment income received and the annuity rates when
you retire. Employees who change jobs regularly, who suffer redundancy and periods
of unemployment, who wish to retire early, or who take career breaks for whatever
reason (to look after children or dependants for example) may find that their
pension provision is inadequate.
Additional Voluntary Contributions (AVCs)
provide 'top up' pension entitlement. Sometimes these extra payments purchase
'added years' to a final salary arrangement, sometimes they are invested to produce
a fund available to increase the income at retirement.
Employers may offer such a facility 'in-house' through the company pension scheme.
Alternatively, employees may contribute to a Free
Standing AVC scheme with an insurance company. This supplements an occupational
scheme, but is private from your employer. It is also possible for certain individuals
in occupational schemes to contribute to personal pensions under the concurrency
rules.
Personal Pension
A personal pension is
an option if you are self-employed or your employer does not run a company scheme.
A personal pension plan charges the individual for setting up the plan, unlike
an occupational pension scheme where the employer often pays the charges. The
effect of charges can be significant and erode the value of your plan, especially
if you have to stop, start or suspend premiums or change the selected retirement
age that you originally applied for.
Stakeholder
pensions are personal pension plans which meet certain
statutory requirements. For example the provider's charges
may not exceed 1% annually of the fund value and there can't
be any transfer penalties or exit penalties. Whilst there is
no minimum level of contribution, product providers can refuse
to accept premiums below £20 (whether as a single, annual
or monthly premium). Most employers have to provide access
to a stakeholder arrangement via the workplace. Some do not
and these include employers whose existing pensions arrangements
meet (or exceed) specified criteria and those who do not employ
sufficient staff.
Anyone can take out a normal personal or stakeholder pension: it doesn't
matter whether they earn money or not. However, contributions are limited to £3,600pa,
including the tax relief, unless you have relevant earnings which don't
have a pension arrangement. Depending on your age, you can contribute between
17. 5% and 40% of your salary, subject to the earnings
cap. If your employer also contributes, the combined amount cannot exceed
these limits.
Personal pensions are built up on a money
purchase basis. This means that the level of pension depends on the amount
of money paid in, the investment income received on that money and the cost of
buying the pension at retirement. The size of your pension fund at maturity depends
on how well the underlying assets performed. You can choose from two basic fund
types: with profit and unit linked . At retirement date up to 25% of the money
built up in this way can be taken as a tax-free cash sum. The rest of the money
is used to buy a income from an insurance company.
The monies paid into the scheme are invested with a pension provider such as
an insurance company, friendly society, bank or building society. When you retire,
payment of the pension is normally arranged through an insurance company.
Pensions are intended as long term investments. The equity based ones are dependent
on stock market movements.
This means your capital is not usually guaranteed to be safe and so you may lose
some or all of it.
If the investment is a unit-linked one,
its value can reduce in direct relation to the stock market prices of its underlying
assets, although it can also rise. This means you may not get back all the money
you invested. If it is a with-profit arrangement,
there is not the same direct link between the underlying assets and the value
of your policy. This is because the insurance company holds back some profit
from good years to offset losses in poor ones - this is referred to as
smoothing. The provider cannot withdraw any reversionary bonuses declared, although
your early withdrawal may result in a Market Value Adjustment - effectively
a financial ‘penalty'.
Levels and bases of, and reliefs from, taxation are subject to change and any
tax reliefs referred to are the current ones and their value will depend on the
circumstances of the individual investor.
Hedgelands Financial Services Ltd, Hedgelands, Abbotskerswell, Newton
Abbot, TQ12 5PW
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Telephone
0845
165 1280
General Insurance
0845 165 1281
Fax
01626 332622
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