Pension

Stakeholder Pension

The stakeholder pension was first outlined by the Government in 1998 and introduced in April 2001.

Aimed at appealing to lower earners (defined as earning about £9,000 to £20,000 a year), stakeholders are low-cost, transparent and flexible pensions.

A stakeholder pension must:

• Come with no entry charges.


• Carry charges of no more than 1.5% of the pension fund


• Allow low minimum contributions of £20 or less


• Let contributors stop and start contributions at will and free of charge.

Anyone can take out a stakeholder pension, including carers, people on career breaks, and anyone else who is not earning if they or someone else can afford to contribute for them. This sets them apart from normal personal pensions, which are only available to tax-paying earners. The maximum tax-relieved contribution allowance is £3,600 a year.

Personal Pension Plan

Personal Pensions were introduced in 1988. Unlike stakeholder plans which have certain criteria laid down by government as detailed under stakeholder section, rules for personal pensions differ.

Stakeholder

• Have no entry charges
• Maximum annual charge of no more than 1.5% of the pension fund
• Allow low minimum contributions of £20
• Let contributors stop and start contributions at will and free of charges
• No transfer penalties

Personal Pension

• May have entry charges
• Can carry charges higher than 1.5% of the pension fund
• Provider may set there own minimum premium levels for entry
• Charges may apply for stopping and starting contributions
• May have transfer penalties

Group Personal Pension

A GPP is type of personal pension that is often mistaken for an occupational scheme.

A GPP is organised by the employer with a single pension company. The employer chooses the pension provider. If an employee signs up to a GPP, they have an individual personal pension with the provider.

The employer may be able to negotiate better terms (lower charges) with the GPP provider than the individual would get if they bought a personal pension of their own from the same supplier.

And the employer may add contributions to each individual's pension within the GPP.

However, an individual may be able to arrange a more suitable (more flexible or with a better investment performance) personal pension of their own from another supplier than the GPP offers. And they may be able to persuade the employer to contribute to their own personal pension.

Company Money Purchase Pension

Money purchase pension schemes are fast taking over final salary as the accepted type of company pension.

• Your contributions and your employer's are invested on your behalf and the proceeds of your own 'pot' are made available to you when you retire.


• The pension fund grows in a tax efficient environment.


• Some of your pot can be taken as a tax-free lump sum when you retire, but most of it is used to buy annuity.


• The downside of a money purchase occupational pension, as opposed to a final salary scheme, is that it does not guarantee the level of income you will have in retirement.


• Employers contribute some of the costs to these schemes.


• Most occupational schemes will provide benefits for your family or dependents if you die before retirement age.

Company Final Salary Pension

The final salary-type pension is the original, and often the most generous company scheme. This type of pension is fast disappearing.

• If you work for a firm that offers a company pension it nearly always makes sense to join the scheme


• Employers contribute some of the costs to these schemes.


• This type of pension is also known as a defined benefit pension


• It is defined in that you know that the amount of pension you receive when you retire will be calculated using a set formula


• The key factor in the formula is how long you have worked for your employer. The longer you have been employed by them, the larger the proportion of your final salary you will receive on retirement


• Whether you die before or after retirement, a final salary scheme also pays a pension to your spouse. Most final salary pension schemes are simply to good to ignore

AVCs and FSAVCs

Putting as much extra money as possible into your pension can bring substantial rewards

Additional Voluntary Contributions

• As a member of an occupational scheme, you can make AVCs to your pension fund either on a regular basis or as one-off lump sum payments


• Your employer will either meet the running cost of the AVC entirely, or will negotiate a low-charge system with the pension provider


• The employer has the power to do this because they are offering multiple cases to the pensions provider.

Free Standing Additional Voluntary Contributions

The main drawback of the FSAVC compared to the AVC is the charges - as an individual, you will face higher administration fees and charges than as part of a group.

Contribution Limits are £3600 gross or up to 100% of your earnings with tax rebate, the rest up to annual allowance limit of £225,000 no tax rebate.

Changing Your Pension

What do you do with your occupational scheme if you change jobs?

If you change jobs and you have been in your occupational scheme for two years or more you have a number of choices over what to do with your pension rights.

You can leave them behind, with your scheme revaluing them at least in line with Retail Price inflation increases, albeit with a five per cent cap.

You can transfer their value to the next employer's scheme, where you will be offered extra pension in your new scheme, or extra years to count in its pension formula. All your rights would then come from one place.

Alternatively, you could transfer them to a personal pension scheme, where the money would grow and be converted into pension when you retire. Your adviser has to look at the figures before recommending a transfer.

Transferring Your Pension

If you have an occupational pension with your existing company and you decide to change jobs, you must make a decision on what to do with that pension. You have two options: you can leave it where it is, or take the pension with you.

If you decide to take the pension with you, you essentially have to roll it over or 'transfer' it into the new company scheme, or into a personal pension if there is no company scheme available to you at your new place of work.

You will not always get the full value of your pension pot, however. You will have to ask the pension provider to calculate the 'transfer value' of your retirement benefits. They will calculate this in two different ways, depending on the type of company scheme you are in.

If the scheme you are leaving is occupational money purchase, the transfer value is the amount standing in your account built up from the invested contributions this is sometimes reduced by a termination penalty.

If you are leaving a final salary scheme the transfer value is the value put on your pension rights due at retirement age discounted to the date of leaving by the scheme actuary to give its value today.

Suspending Your Pension Rights

If you are in an occupational pension scheme with your present employer but are due to change jobs, you may choose to suspend your existing pension. This means that you leave it where it is, and it should continue to grow until you reach retirement. There is nothing wrong with this option, but do make sure that you either start contributing to the new company pension as soon as possible, or take out a personal pension of some form if there is no occupational scheme available at your new place of work.

Note that you are allowed to contribute to as many personal pension schemes as you like within the tax-free limits, but you are only ever allowed to contribute to one company pension at a time.

Keep track of any suspended pensions, and seek them out as soon as you retire. Remember, billions of pounds are lying around in forgotten pension policies - make sure you get your full retirement benefits.

Going Back To Work

In these days of increasing flexibility, more and more people are taking time out of work to go traveling, return to university or go on sabbatical, for example. And of course many people - mainly women - take time out to start families. If you have done this, and then return to work, what are your pension options?

Start a pension

If you didn't have one before you stopped working, join your company pension or start a personal pension now.

Start contributing again

If you had a company pension and go back to the same place of work, start contributing again as soon as you can.

If you go to another company that offers a pension, sign up to it, and look at transferring your old company pension over.

If your new company doesn't offer a pension or you start work as a self-employed person, start up a personal pension as soon as you can afford it.

Income in Retirement

Unless you are in a final salary pension, your final investment is the annuity, which will provide annual income after you retire

An annuity is a life assurance contract that guarantees to pay you an annual income (the annuity) every year for the rest of your life.

It is bought with the money that has built up in your pension pot, and essentially provides cover against the risk of you running out of savings.

A pension annuity is known as a compulsory purchase annuity, because pensioners are all obliged to buy one by the age of 75.

At the moment, in a low interest rate environment, annuity rates are correspondingly low.

The level of income an annuity will provide largely depends on your age and sex.

The older you are, the more it will pay annually as the more likely you are to die sooner.

Women receive lower annuities than men, as their life expectancy is greater, so the policy will have to pay out for longer.

The Government is considering alternatives to compulsory annuity purchase.

A pension is a long term investment. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The fund value may fluctuate and can go down. Tax legislation can and may change in the future.


We look forward to being of assistance to you.