Thomas Anthony

PENSIONS

Why do I need to save for retirement?

Your retirement may last for 20 or 30 years or more. You will need a substantial sum of money to support yourself over such a long period and the basic pension is not enough to provide the standard of living most people want. To provide a good standard of living, you will need another source of retirement income as well.

Putting money aside for retirement is the biggest commitment most people make - bigger even than buying a house. It's important not to make a rushed decision. You need to think carefully about what type of savings or investment plan will work best for you.

What types of pensions are there?

There are currently four sources of pensions income for your retirement:

	the basic state pension for people who've paid National Insurance contributions while at work or have been credited with contributions.

	additional state pension - This in now the state second pension. Before 6th April 2002, you built up SERPS (state earnings related pension scheme) pension. Both are available to employees earning more than a given amount (£79 a week from 6th April 2004). Many people who are not working because they are caring for young children or, say, an elderly relative or because of disability or long term illness are also able to build up state second pension (but not SERPS). Additional state pension is not available in respect of self-employment income.

	an occupational pension through an employer's pension scheme - if your employer runs a pension scheme, it's usually a good idea to join.

	a personal pension scheme (including stakeholder schemes) open to nearly everyone and especially useful if you are self-employed or if your employer doesn't run a company scheme.

State pensions are small and unlikely to give you enough income to live in the style you've been used to when working. From 6th April 2006, the basic state pension (also known as the old age pension) is only £84.25 a week for a single person and up to £134.75 for a married couple (though you would be able to claim means-tested state benefits if that was your only income).

It's important to be thinking about how best to build up an additional retirement fund. You're never too young to start a pension - the longer you leave it the more you'll have to pay to build up a decent fund.

Occupational pension schemes (employers' pension schemes)

If your employer runs a pension scheme, it's usually a good idea to join. Your employer must contribute to the scheme on your behalf and generally you get a package of benefits, which will often include:

	a pension (taxable) payable from the normal retirement age for the scheme (often 65 years).

	annual increases to the pension once you start receiving it.

	tax-free lump sum payable at retirement.

	the possibility of retiring earlier, but on a reduced pension (current rules are under review and, in future, you may be able to start receiving your pension early without stopping work).

	a pension if you have to retire early because ill health.

	pensions for your widow/er and other dependants if you die.

	life insurance which pays a lump sum to your dependants if you die.

Employer pension schemes can be of two types:

	final salary (also called 'defined benefit'). With these, you are promised a pension worked out according to a formula based on your pay and the length of time you have been in the scheme. The 'promised' pension may be lower if you leave the scheme before retirement or if the scheme closes before then.

	money purchase (also called 'defined contribution'). These work like savings plans. The amount of pensions you get depends on the amount paid in, how well your investment grows, the amount deducted in charges and the rate at which you can swap your pension fund for pension at retirement.

	executive pension plans (EPP). An Executive Pension Plan is set up by your employer on your behalf to provide a pension for you in retirement. Your employer undertakes to pay contributions to the plan until your normal retirement age. This can be any age between 60 and 75, and may require you to make contributions as well. you may also pay additional contributions to the plan to secure a higher pension.

	small self-administered Scheme (SSAS). A self-administered company pension scheme established for the directors and senior executives of limited companies. SSAS's offer a wide range of investment opportunities. For the family operated company or entrepreneurial director the SSAS is the most effective pension vehicle for long term planning and family protection, for short term company planning with respect to flexible investment options and also the significant pre-retirement tax planning and savings. For further information please contact us.

Group personal pension schemes

Some employers offer pension arrangements called 'group personal pension schemes'. These are effectively personal pensions, and so are covered by the rules for personal pension plans. However, a group personal pension scheme can have advantages over taking out personal plan independently if:

your employer pays into the plan on your behalf. These contributions will stop if your job changes.

your employer has negotiated special terms with the provider, for example, reduce costs or flexible contributions. You may lose these advantages if you change jobs.

Personal Pensions

Unlike an occupational pension scheme you pay all the costs of setting up a personal pension plan. Traditionally, charges have often eaten heavily into savings, especially if you committed yourself to saving regularly but then had to stop, perhaps because you lost your job, stopped work to have a baby or got the chance to join an occupational scheme. Of those who start a personal plan, as many as one person in every four stops paying in within three years. They often then see a large part- sometimes all- of their savings swallowed up by the cost of setting up the plan.

But since April 2001, personal pensions that meet certain conditions have been able to qualify as Stakeholder Pensions. The conditions include low charges, flexible contributions and no extra charges if you transfer to another scheme. If you are newly starting a pension scheme, it makes sense to consider a stakeholder pension. If you already have a personal pension, beware of switching to a stakeholder scheme -you may already have paid the bulk of the personal pension charges and could lose by switching.

(SIPPS). A self-administered personal pension scheme, combining a full range of investment opportunities with maximum flexibility on retirement.

Pensions Tax Simplification

On 6th April 2006 a new tax regime for pensions called Pensions Tax Simplification was introduced by the government. It will replace the eight previous tax regimes with one. You can find out more about pensions tax simplification on H.M Revenue & Customs website.

Changes to section What Types Of Pension Are There- para starting with State pensions are small…. Change to £84.24 per week for single person, £134.75 for a married couple.

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