Pensions

When it comes to providing for our retirement, too many people 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 not to rely on the state alone. Modern pensions benefit from some exceptional tax breaks, and nowadays, you can even contribute to your pension when you don’t work! With new legislation being introduced by the Government this year, you will also have more options as to how you receive your pension money in retirement.

The value of your investment can go down as well as up and you may not get back the full amount you have invested.

Pensions

Stakeholder Pension

A stakeholder pension plan (SHP) is a type of defined contribution arrangement. It is essentially an investment policy that provides an income in retirement.

It is available to any UK resident who is under 75 years of age and can be bought from insurance companies, high street banks, investment organisations and some retailers (i.e. supermarkets and high street shops).

The policyholder contributes to the plan, the money is invested and a fund is built up. The amount of pension payable when the policyholder retires is dependent upon:

  • the amount of money paid into the scheme
  • how well the investment funds perform
  • the ‘annuity rate’ at the date of retirement. An annuity rate is the factor used to convert the ‘pot of money’ into a pension

The policyholder can retire at any age after 55 (subject to plan restrictions).  When the policyholder does retire, they can generally take up to 25% of the value of their fund as a tax-free lump sum. The remainder of the fund can be used to buy an annuity with an insurance company.

A SHP differs from a personal pension plan because it has been designed to incorporate a set of minimum standards laid down by the Government. These include:

  • a charging structure that is capped at a maximum of 1.5% a year for the first 10 years and 1% a year thereafter;
  • there can be no penalties on altering or stopping contributions or on transferring the benefits to another scheme; and
  • providers may only refuse to accept contributions if they are less than £20.

Personal Pension

Personal pension plans (PPPs) and stakeholder pension schemes (SHPs) are defined contribution arrangements.

They are essentially investment policies that provide an income in retirement.  They are available to any UK resident and can be bought from insurance companies, high street banks, investment organisations and some retailers (i.e. supermarkets and high street shops).

Policyholders contribute to their plan, the money is invested and a fund is built up. The amount of pension payable when the policyholder retires is dependent upon:

  • the amount of money paid into the scheme;
  • how well the investment funds perform; and
  • the ‘annuity rate’ at the date of retirement. An annuity rate is the factor used to convert the ‘pot of money’ into a pension.

The policyholder can normally retire at any age after 55 (subject to plan restrictions).

When the policyholder does retire, they can generally take up to 25% of the value of their fund as a tax-free lump sum. The remainder of the fund can be used to buy an annuity with an insurance company.

SIPP

A SIPP (Self Invested Personal Pension) is a personal pension which allows the member a much broader range of investments compared to a traditional Personal Pension.

Some of the examples of the exciting investment opportunities today’s discerning investor may want to access include commercial property, land, overseas property funds, residential property funds, quoted and unquoted shares, trusts, unit trusts and OEICs

As well as having excellent investment freedom a SIPP still maintains the significant tax advantages of a pension, with full tax relief on contributions.

A SIPP also offers much greater flexibility in the way benefits may be taken in retirement. Up to 25% of the value of your SIPP investments can be taken as a tax free cash sum whilst the remainder remains invested.

At retirement, you have a number of choices. You can draw income from your invested fund, known as income drawdown, buy an annuity, or have a combination of phased retirement and income drawdown.

Please note that SIPP pensions generally have higher charges than traditional pension schemes. You should take note of these so you are prepared for the costs.

Auto Enrolment

The government has introduced a new law to make it easier for people to save for their retirement.

It requires all employers to enrol their workers into a qualifying workplace scheme if they are not already in one.  At present, many workers fail to take up valuable pension benefits because they do not make an application to join their employer’s scheme.  Automatic enrolment is meant to overcome this.