Pensions

Stakeholder Pension
The State Pension
Occupational Pension Schemes
Changing employers
Personal Pension Schemes
Additional Voluntary Contributions
Executive Pension Plans
Small Self Administered Pension Schemes
Annuities

 

The time has long passed since anyone could maintain a reasonable lifestyle in retirement relying on the state retirement pension, and, with increased life expectancy, coupled with a lower percentage of the population in employment, the situation is unlikely to improve. This is why the government has encouraged people to secure their own future with a personal pension plan.

In many ways, pensions provide the most effective of all tax efficient investments. Contributions receive tax relief and capital growth within the pension is tax free. On retirement, a proportion of the accumulated fund can be taken as a tax free lump sum while the balance is used to purchase an annuity, guaranteed to pay a fixed or increasing sum.

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The State Pension

The basic state pension is paid to all who have made sufficient national contributions. It is up rated annually by the rate of inflation. For the year 2002/2003 the annual payment is £6274.40 for a couple and £3926 for a single person. Because they are only increased in line with inflation they will not keep pace with earnings, and will, relatively speaking decline in value over the years to come.

Additionally, there is the State Earnings Related Pension Scheme (SERPS), which is based on earnings in employment since 1978. This gives 1.25% of earnings, revalued for inflation for each year worked with contributions to the scheme, subject to a maximum of 20 years, equivalent to 25% of earnings for 1998-1999. The rules were changed in 1986 so that SERPS will pay a maximum of 20% of average career earnings,revalued in line with inflation, a significant reduction. Those retiring between 1999 and 2010 will be subject to a transition from the old scale to the new. Not all earnings count towards the SERPS calculation, only those in the "middle band". Many individuals in company pension schemes will have contracted out of SERPS. Additionally, the government has offered incentives to certain individuals to replace their SERPS with a personal pension scheme, but the advantages and disadvantages of doing so are complex and individual independent advice is required.

The Government has announced plans to reform SERPS in 2002 to provide a more generous additional state pension for low and moderate earners, and certain carers and people with a long-term illness or disability.

This will be called the State Second Pension.

It will give employees earning up to about £22,000 a year (at 2000/01 levels) a better pension than SERPS, with the most help going to those on the lowest earnings (up to around £10,000 a year at 2000/01 levels). The State Second Pension will for the first time, cover certain carers and people with a long-term illness or disability, whose working lives have been interrupted or shortened. They will be able to build up an additional state pension for periods when they cannot work.

For further information see the DSS website http://web.archive.org/web/20041230195809/http://www.dss.gov.uk/

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Occupational Pension Schemes

Occupational pension schemes may be a company scheme where the fund is managed by trustees, and where the ultimate pension is based on final salary, but there is discretion to raise the pension for all pensioners over future years. Smaller companies will tend to have a scheme arranged by an insurance company. These may be final salary schemes with a pension based on final salary (normally 1/60th of final salary for each year worked subject to Inland Revenue limits) or defined contribution schemes which pay out a sum based on individual contributions for purchase of a retirement annuity.

Contributions may be paid wholly or in part by the employer.

Changing employers

It is increasingly likely that people will change jobs during their working life. On leaving an employer there is the option of transferring a share in the pension scheme, either to the new employer's scheme or into a personal pension scheme or leaving the accrued benefits frozen in the original employer's scheme. The decision will depend on the terms of each scheme, the transfer value offered and the likelihood of future job changes. The options need to be considered and advice given by an independent financial adviser.

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Personal Pension Schemes

Many employers do not have a pension scheme or the benefits to belonging to an employers scheme may be outweighed by the possibility of frequent changes of occupation.. It is therefore possible to take out a personal pension scheme, normally through a life company or investment institution. A personal scheme offers considerable attractions. Contributions are tax free within inland revenue limits and can be varied from year to year with additional capital sums being added from time to time (depending upon the terms of the particular company). Options are now available for phased retirement, allowing a switch to part time employment before full retirement, or retirement at a later age or permanent disability , giving added security and protection.

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Additional Voluntary Contributions (AVCs)
Free Standing Additional Voluntary Contributions (FSAVCs)

AVCs and FSAVCs allow additional contributions to be made to a pension . AVCs are added to an existing company scheme, while FSAVCs are a separate personal pension though there is no option to take a tax free lump sum. Contributions to both AVCs and FSAVCs attract tax relief provided they do not breach the overall limit for pension contributions of 15% of salary.

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Executive Pension Plans

Executive pension plans are simply an occupational pension scheme for individual or small groups of directors or executives. They are normally money purchase plans and are subject to normal inland revenue rules.

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Small Self Administered Pension Schemes (SSAPS)

SSAPS are occupational schemes for up to 12 members, normally directors of small companies. They are administered by a trustee and there is no necessity to use an insurance company, as the investments are held in the name of and managed by the trustee. There are certain benefits for the company and the members in such a scheme, though the administration is strictly monitored by the inland revenue to ensure compliance with the rules.

Stakeholder Pension Plans

A new type of pension, the Stakeholder, was launched on 6th April 2001.These are simple, low cost, basic products, aimed principally at those earning over £10,000 a year who are not in occupational pensions schemes. Contributions is limited to the lower of 100% of earnings or £3,600 per annum, but for those with higher earning levels, the contribution limits are higher. This means that non-working spouses and even children could contribute up to the £3,600 per annum and receive income tax relief. There is no proof of earnings requirement, but a proof of UK residence is required. Further incentives may be given through National Insurance rebates. Employers with 5 or more employees without an occupational scheme will be forced to offer staff access to stakeholder pensions. This includes anyone employed, for example a nanny or gardener.

To qualify for the Government's CAT standard (Charges, Accessibility, Terms) charges are limited to 1% per annum of the Fund Value with no penalties for suspension of contributions and no charges for transfers in or out. The charge is designed to meet all operating costs and include a reasonable allowance for the cost of basic advice and information.

The drawbacks of the stakeholder pension would appear to be that any insurance add-ons, for example Waiver of Premium, where premiums continue to be paid in times of illness and disability will be additional and not qualify for tax relief.

Some of the government proposals at present appear contradictory in aim. For example while the basic State Pension remains linked to inflation, the minimum income for pensioners is linked to earnings and is set to rise at a much faster level, in effect penalising anyone with a small pension.

The State Second Pension, replacing SERPs will be paid to anyone paying National Insurance. The minimum pension will be based on earnings of £9,000 per annum even if the income is only marginally above the minimum level for contributions.


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Annuities

Annuities provide a guaranteed income for life. A lump sum is used to purchase an annuity from a life company. The company will quote a rate of return which will be based on an estimate of the life expectancy of the annuitant, coupled with interest rate levels. The older the annuitant is at the time of purchase, the higher the annuity for a given sum. An annuity payment (other than a pension annuity) is deemed to be part income and part repayment of capital, normally on the death of the annuitant there is no residual value.

It is possible to have an increasing annuity with the payments increasing by a fixed percentage each year, though this means that the annuity at outset will be lower. It is also possible to have a guaranteed period of payment, so that all is not lost if the annuitant dies during the guarantee period..

Joint life, second survivor annuities are paid to a couple, continuing until the death of the second partner. Because of the increased life expectancy on two lives, the rates are normally lower.

Annuities are a key element in pensions provided by personal pension schemes, FSAVCs and money purchase schemes. Until recently, with the exception of the tax free lump sum, the pension fund had to be invested in an annuity. The trend towards lower interest rates, coupled with greater life expectancy has led to the growth of With Profit Annuities and income drawdown schemes, whereby the pension capital is invested in funds which while paying an income (normally a percentage of the capital) also have the prospect of further capital growth. This can continue to the age of 75, when the traditional annuity must be purchased. By this age the annuity income should be greater given the higher age. Income from a pension annuity is treated as wholly earned income and is taxable in full.



Jay Cover - independent Advice

To provide you with appropriate advice, the adviser will require as much information about your circumstances, needs and aspirations as you can give. A form requesting information on personal financial details is included on the individual IFA sites. It can either be completed online and sent by E-mail direct to the adviser of your choice, or be printed, completed and sent by post.



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