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
Self Administered Pension Schemes
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.
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.
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
may be paid wholly or in part by the employer.
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
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
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.
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.
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
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.
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.
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.