Pensions
- What does the term "Pensions" cover?
- Employers’ Schemes
- Personal Pension Plans
- Taking retirement benefits
- State Pensions
- Why plan at all?
- What help does the government provide?
- Who can I talk to about this?
What does the term ‘Pensions’ cover?
‘Pensions’ is a broad term for plans designed to provide retirement income. It also defines the income from plans and also from the State. There is a long history to the existing pensions framework in this country and this involves State provision, employers’ schemes and personal pension plans funded by the individual.
Before retirement some thought has to be given to how income will be provided when you stop working - the earlier planning starts, the more comfortable retirement should be.
Many employers offer some sort of pension scheme for staff. There are two main sorts of plans. The first of these aims to provide a set proportion of your salary at retirement, depending on the length of your employment. These are often known as final salary or defined benefit schemes.
The second method of payment is for an employer to provide a defined amount of contribution to a plan - a defined contribution or money purchase scheme. The aim is to build a fund from which retirement benefits will be provided - the level of retirement income will depend on the size of the fund.
The money purchase arrangements can vary in terms of their rules. Increasingly employers are using grouped forms of personal pensions or ‘stakeholder’ plans. Even though the employer may contribute, these are really a personal plan and it can continue to be used even if you change to another employer.
These plans are individual pension arrangements, even though some may be set up by the employer. Generally the plans are provided by insurance companies and they are designed to accommodate events such as changes in employment and variation in premium levels.
Pension can be taken at any age between 50 and 75 and there is a choice over how the benefits will be paid. The size of the fund at your chosen retirement age dictates the amount of income that can be met.
The plans are suitable for employees and the self-employed and can even receive contributions within certain limits from people who are not in employment. So it is possible to start a plan for children or grandchildren, although this will be a long term arrangement! In certain circumstances it is possible to run a personal pension plan even when you are already in an employer’s scheme as a way of topping up.
Employers’ schemes are usually designed to provide benefits at a specific age. Early retirement there can be a pension payable, but it will be at a reduced level, depending on the rules of the scheme. If the scheme is final salary then a proportion of your last income in employment is paid as pension, usually with annual increases throughout retirement.
If plans are money purchase, the value of the fund is usually used to purchase an annuity. The annuity will provide a predetermined income for life and can also provide spouse’s benefits. In employer’s schemes the rules of the plan may dictate the sort of pension that is to be paid.
Personal Pension plans allow for retirement at any age from 50 to 75. But as it is the size of the fund that dictates the pension payable, young retirees need a substantial fund to make this worthwhile. Again an annuity can be purchased, but it is also possible to keep the fund invested without purchasing an annuity and also take retirement income from it - this is known as income drawdown.
The State continues to provide pensions for those in retirement. Basic State pension is payable from age 65 (women in some age groups will still get benefits earlier than this) and the level of basic pension may depend on the number of years worked. There have also been a number of top up pension schemes for which contributions have been met from National Insurance Contributions. For a number of people, there may be additional State Pension payable, possibly under successive forms of these schemes.
To add confusion to this aspect of State provision, it has been possible from 1988 to contract out of the top up options offered by the Government and to have part of your National Insurance Contribution directed to either an employer’s scheme or a personal pension plan. The pension offered under this part of your individual pension arrangements will usually be on terms closely matching those under the State schemes (the benefits can be taken between age 60 and 75.
Retirement income remains a major issue for all. There has been much speculation as to how the Government will support viable pension arrangements as the existing workforce moves into old age. People are living longer and this has created enormous strain on public resources: many people who are working now will move into retirement on very small retirement incomes.
The Government has been keen for individuals to take more control over their own arrangements - so,
What help does the Government provide?
There is very generous tax relief available for those who contribute to their own pension plans. This is in the form of a reduction on contributions up to the level of basic rate tax - a £78 contribution actually means £100 is paid into the plan.
A higher rate tax-payer can claim a further 18% via the annual tax return, so the £100 contribution effectively costs only £60.
Within the fund, investment growth is in a favourable tax environment - this combination of factors means that in a positive investment climate, payment into a pension plan will produce a very healthy long-term benefit in the form of income in retirement.
For more information on how we can help in this area, please call or email Tony Hastings. Our telephone number is 01844 261283.
