Money Minder UK

Pensions

Essentially, over and above the pension benefits that are provided by the Government, (i.e. - basic state pension and the state 2nd pension, a.k.a S2P) the main options for saving in to a pension will be for the majority the choice of joining a 'company pension scheme' or paying in to a 'personal pension plan'.

Over the last few years, many company pension schemes have been identified as being at risk of not having enough money in them to meet all their future liabilties and employers have had to invest huge sums of money in to them to try to make up the percieved shortfalls. This has led to many schemes actually closing the doors to new members and in some cases having to wind up company pension scheme altogether. This means that it is no longer possible to say that joining a company pension scheme is always the best thing and for that reason its worth getting some independent financial advice from an independent financial adviser that is a speciallist in pension issues.

Some employers are willing to pay in to a pension scheme on your behalf and if you have this option it is generally not a good idea to let that pass you by.

If you don't have access to an employer based pension scheme than your main options are going to be to save in to a Stakeholder Pension Plan, a Personal Pension Plan or a Self Invested Personal Pension Plan.

When you get to retirement, you're still going to need to eat and pay your normal household bills. On top of that, after a lifetime of work, you're likely to want a bit left over so that you can enjoy your retirement!

The basic state pension on its own doesn't pay much a week, so the earlier you start saving towards your retirement the better.

The sooner the better........

With life expectancy going up, in the future there are likely to be lots of people that will have as many years spending money in retirement as they had working years to saving towards it.

By starting to save early, you could build up a significant sum of money in your pension pot that will go a huge way towards maintaining or even enhancing the lifestyle you had before you retired. However, if you don't get started soon enough, you run the risk of not being able to retire when you wanted to or you might even have to carry on working part time throughout your retirement years to give you enough money to live on.

A personal pension plan is a tax efficient savings plan designed to provide a regular income in retirement.

They are normally provided by organisations like life assurance companies, specialist pension provider businesses, banks and some investment firms. If you're looking for advice about starting a pension or paying more in to or reviewing an existing personal pension plan, you should speak to an independent financial adviser.

Your contributions are invested in to one or more pension investment funds. In time, the value of your fund should increase until you are ready to receive your benefits, at which point you will use the fund that you have saved up over the years to provide you with an income.

One of the great advantages that Personal Pension Plans have over other types of investment is the considerable tax concessions that your contributions and investment funds receive.

Firstly, your contributions receive tax relief based on the highest rate of tax you pay.

Secondly, money invested inside a pension grows free of almost all income and capital gains tax, (a very small amount of tax is payable on dividend income from UK based shares and tax might be payable in respect of investments held overseas, dependent on that individual country's rules).

You can also arrange for your contributions to go up each year. This helps to increase the amount you'll have in your pension pot in the future. You can often arrange them to go up by a fixed amount each year (say 5%), or by inflation. By having them increase year on year, it will help you to ensure that as your wage goes up, so does your pension contribution.

Way back in 2001, according to a study carried out by the Association of Consulting Actuaries (ACA), workers starting a pension at age 25 should invest a minimum of 10% of their income if they want to retire with just under 2/3rds of their final wage to live on.

However, they also said that those wanting to retire early, or who were starting later than age 25, needed to invest much more.

At that time, the ACA recommended that those starting a pension at the age of 35 need to invest between 15% to 20% of their salary whilst those starting at age 45 were told to ensure that 25% to 30% of their income was invested.

Since that time, The Financial Conduct Authority (FCA) and the Consumer Financial Education Body (CFEB) have updated these figures and now recommend even higher contributions. Based on the age when you start paying in to a pension, they now suggest that the contributions you'll need to pay in to give you a similar lifestyle to the one you had before you retired are as follows:

  • Age 30: 12-18%
  • Age 35: 16-22%
  • Age 40: 18-25%
  • Age 45: 25-30%
  • Age 50: 30-45%
  • Age 55: 45-70%

The CFEB also provides an online pension calculator so that users can get an idea of how much their pension is going to be worth in the future.

By filling in the form with details about your age, your current pension contributions, the amount you have managed to save in to your pension so far and when you want to retire, the calculator will then estimate for you how much of a monthly pension you can expect when you finally give up work.

However, it's important to remember that the online calculator can only give you a rough estimate about what you might get in retirement and the main thing to remember is that the more you put in, the more you are likely to get back. Always take full account of what you can afford to save in to your pension each month as well and make sure that all of your life assurance, critical illness and income protection needs are all sorted out before you start investing your spare cash in to a pension fund that may not be much help to you if you were unable to work or were diagnosed with a critical illness before reaching retirement age.

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From April 2001, as part of the restructuring of Welfare Reform, the Government introduced fundamental changes to the structure of UK pensions provision.

Stakeholder Pensions were introduced as simple, low cost pensions, designed to encourage more people to provide for their own retirement.

The Government's broad objectives were:

'Those who are able, should save what they can for their retirement.'

'The Government should support those who cannot save and regulate the pension system effectively.'

'The private sector should provide affordable and secure second pensions.'

(source: 'Partnership in Pensions' Green Paper December 1998)

Under current legislation, you are able to start enjoying the benefits of a pension from the age of 55, unless you are in a job where you have special permissions from HM Revenue and Customs to draw the benefits of a pension earlier than this such as Armed Forces personnel.

There are a number of different options available when you come to draw your pension. They include: -

  • Using your pension fund to buy a guaranteed income for life with your pension fund, (known as an annuity)

    When buying an annuity, the following are examples of the types of pension income that can be provided -

    • A level pension for life
    • A reduced pension, with a tax free lump sum
    • An escalating pension
    • A widow/ers benefit can be provided for
    • A number of other options are also available which can be discussed in more detail when you retire
  • Keeping your pension fund invested and taking an income directly from it, (known as 'unsecured income')

    When considering 'unsecured income', the following are points are very important to bear in mind -

    • It is most suited to larger fund values - i.e. over £100,000
    • Most people using 'unsecured income' do so in the hope that annuity rates will be higher in the future
    • But, Annuity rates may get lower in the future
    • Benefits on death of the owner of the pension fund are much more flexible than an annuity
    • But, if a lump sum was paid out to the owners estate, it may create a tax liability
    • The income payable may be higher than what would have been available from an annuity
    • But, if the funds invested don't perform well, the income being paid could go down in the future
    • There is the potential for the pensioner to see an increase in the fund value of the pension over time
    • But, the pension fund could also go down in value over time because the money remains invested
    • A number of other options are also available which can be discussed in more detail when you retire

Since April 2006, there have been significant changes in the way that people can to start to enjoy the benefits of their accumulated pension fund.

You should start investigating your retirement options at least 3 months before you are due to retire so that you have enough time to consider the pro's an con's of all of the different options available to you before making your final decision. If you would like some help, please contact us.

If you would like to look further into investing into a Personal Pension plan, you can contact us at info@money-minder.com or call us on 0845 218 9194 between 8am and 8pm Monday to Friday and 10 am to 2pm on Saturdays when we will be happy to discuss your requirements further.

We are able to offer a full independent financial advice service and recommend appropriate solutions to your needs that will take account of your personal financial circumstances.