Pension ::

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 income and capital growth within the pension are tax free. On retirement, a proportion of the accumulated fund can be taken as a tax free lump sum while the balance is use to purchase an annuity, guaranteed to pay a fixed or increasing sum.

The State Pension

Occupational Pension Schemes

Changing employers

Personal Pension Schemes

Additional Voluntary Contributions

Executive Pension Plans

Small Self Administered Pension Schemes

Annuities

The State Pension

The basic state pension is paid to all who have made sufficient national contributions. It is operated annually by the rate of inflation. For the year 1999/2000 the annual payment is 5548.40 for a couple and 3471.00 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 since 1978. This gives 1.25% of earnings for each year worked with contributions to the scheme, subject to a maximum of 25% of earnings. Many individuals in company pension schemes will have contracted out of SERPS. Additionally, the government has encouraged 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.

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.

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, permanent disability or critical illness, giving added security and protection.

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.

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.

Small Self Administered Pension Schemes (SSAPS)

SSAPSs 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 trustees. 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.

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 after one or two years.

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. With the exception of the tax free lump sum, the pension fund must be invested in an annuity. The level of pension will therefore depend on age and interest rate levels at the time of retirement. Income from a pension annuity is treated as wholly earned income and is taxable in full.

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