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The Basics on
Private Pensions Part 2
PICKING the right
pension is one of the most important financial decisions you
will ever make. If you have not got one already you should waste no time
in tracking down a suitable retirement fund.
If you do have a pension you should monitor its performance and
consider putting more money into it. If you are worried that pensions
tie up your money too much then consider making separate investments
which will produce income or a lump sum for your retirement. There are
limits to the amount which can be paid into a pension and most of us do
not even get close to them.
WORKING out how much money you will have in retirement is fiendishly
complicated. But the tables on these pages should help you. They cover
the main types of pension funds and show how much your investment will
be worth to you.
The tables look at the pensions per week offered by
final salary and
money purchase schemes as well as the effect of
annuity rates on your pension pot.
On top of any payouts from these pensions, workers today will be
entitled to the State Pension - currently £72.50 -a-week for a single
person - plus the State second pension which depends on how many years
you have been working. However young workers should be aware the
State pension is likely to be heavily restricted, if it exists at all,
by the time they reach retirement age.
If you are in an Occupational final salary scheme, the amount of
pension you receive will depend on how long you have worked for and your
salary. Manual workers usually get a less generous payout than
office workers.
And if you are in a money purchase scheme - whether a company scheme,
personal pension or stakeholder - the contribution size and the length
of time you contribute will affect the investment.
Employers and pension providers can give you more guidance on how much
you should expect as a pension and also explain how you can invest more
to boost your pot. Women tend to get poorer pensions than men because
their careers are shorter and they are expected to live longer.
PENSION SCHEMES
On average those who pay into pensions pay between 5% and 8% of their
salaries. But those with company schemes could be paying up to 15%.
Others with personal pensions could pay up to 17.5% at age 35 and the
limit increases to 40% between age 61 and 74.
Remember there are tax benefits to encourage us to invest in a pension -
you do not get an immediate 22% uplift on many other investments. But
with a pension a basic rate taxpayer gets just that. To contribute £1 to
a pension fund he/she has to pay in just 78p.
For a higher rate taxpayer there is a 40% uplift so he/she has to pay in
only 60p of every £1 contribution. Here is Isabelle Kassam's guide to
the types of pension available and who should have them.
OCCUPATIONAL PENSIONS
THESE are pensions set up by your employer and you need to work with the
firm for more than two years to benefit.
In most cases the employer and employee will contribute and it is the
contributions from both parties which make these pensions the first and
best choice for most. You can contribute up to 15% of your annual salary
if you wish but most people contribute between five and eight per
cent.
Often there are additional benefits in the scheme including life
insurance, a pension if you have to retire from illness or a pension for
your dependents if you die. Each scheme is different so employees need
to ask about the rules of their company's scheme to see which benefits
apply.
WHO NEEDS IT: All employees should consider joining the
company scheme unless they are planning to move jobs frequently.
FINAL SALARY SCHEMES
FINAL salary schemes are known by a number of names including salary
based, defined benefit or superannuation pensions.
Recent figures from the TUC show there are 1.8million fewer workers in
these popular schemes than there were ten years ago. The reason is that
these pensions - considered the best for workers are being closed to new
entrants by many companies because of new accounting rules. If you are
in one of these schemes you should feel lucky and if your employer has
one and you are not in it you should get in as soon as possible.
The risk that there is enough money to pay you at retirement rests with
your employer under this scheme and you'll have a good idea how much
pension to expect.
WHO NEEDS IT: If you have an option to get into one of
these schemes grab it now.
MONEY PURCHASE SCHEMES
THESE schemes are also known as defined contribution pensions. All
private pensions are money purchase schemes and increasingly
occupational schemes are more likely to be money purchase
- especially for new employees.
The amount of pension built up in these schemes depends on the amount of
contributions and how that money in invested. On retirement you can
take a tax-free lump sum but you have to use the rest of your pension to
buy an annuity (before age 75)
An annuity is an investment which will pay you an income for the rest of
your life. But the amount you will get depends on annuity rates at the
time you decide to buy.
WHO NEEDS IT: Still a good deal for employees if the
company is contributing.
SERPS
THE State Earnings Related Pension Scheme is an additional state pension
linked to what you earn. You may have been building it up if you have
been working since 1978. The scheme is being reformed in April 2002 and
will become the State Second Pension.
Eventually this will be a flat-rate, not linked to earnings. The
Government introduceD a new idea - the Pension
Credit - in 2003.
This guaranteeS that pensioners' incomes cannot fall below a certain
limit. But this may be as little as £100 a week in 2003.
WHO NEEDS IT: Anyone who has not built up savings and who
may not have paid enough National Insurance contributions for a full
basic state pension.
STATE SECOND PENSION
The State Second Pension, or S2P, was introduced in the UK
on 6 April 2002, to replace the SERPS (State Earnings Related
Pension Scheme). The main aim of this change was to skew existing
Additional Pension (or AP) benefits in favour of low and moderate
earners at the expense of higher earners and to extend access to include
certain carers and people with long-term illness or disability for the
first time.
Differences between SERPS and S2P
Before April 2002, AP was provided through the State
Earnings-Related Pension Scheme, (SERPS). SERPS was a career average
pension scheme, based on the band of earnings each year between a "LEL"
or '"Lower Earnings Limit"' (£5304 in 2011/12) and a "UEL" or '"Upper
Earnings Limit"' (£42,475 in 2011/12). Any SERPS entitlement already
built up is retained and revalued each year in line with the changes in
average earnings (that is, in "real" terms) until State Pension Age. It
is then added to any Basic State Pension payable, and the combined
amount uprated thereafter in line with the index of retail prices (RPI).
S2P gives all employees earning up to £32,592 a year (in 2011/12) a
larger pension than SERPS, regardless of whether they are "contracted
out" or not - with most help going to those in the '"lowest"' earnings
(up to £14,400 a year in 2011/12) - known as the "LET" or '"Low Earnings
Threshold
GROUP PERSONAL
PENSION
ALTHOUGH these are provided through employers, they are not occupational
schemes. But sometimes employers do contribute to them and they may have
negotiated a deal with the pension provider to reduce charges.
The amount you can put in depends on your age and it can be deducted
from your salary every month. Your employer may have asked for the
scheme to include a lump-sum death benefit or insurance against
ill-health. But you will need to check the details with your employer or
pension provider. If you change employers you can take your pension with
you.
The amount of pension built up in these schemes depends on the amount of
contributions and how that money in invested. On retirement you can
take a tax-free lump sum but you have to use the rest of your pension to
buy an annuity.
An annuity is an investment which will pay you an income for the
rest of your life. But the amount you will get depends on annuity rates
at the time you decide to buy.
WHO NEEDS IT: Still a good deal for employees if the
company is contributing.
STAKEHOLDER
PENSIONS
THE newest form of pension - which were introduced in April 2001, are
low-cost retirement savings plans. They are designed to encourage people
on average incomes to save money while they are working so they aren't a
burden on the state. Their low-charging structure has helped to cut
pension costs across the industry. But the schemes have not been as
popular as the Government had hoped. Your employer might offer
one but does not have to contribute or you could set up one through a
pension firm yourself.
At the moment, national insurance contributions are simply paid in by
workers and taken straight out to pay existing pensioners - there is no
element of investment. But the number of workers in the UK is falling
and this is what has created the problem. Because the population is
ageing, the government believes there will be insufficient money in the
pot to provide adequate pensions and wants to boost levels of
self-provision.
Some existing pension plans aimed at individuals can have high
charges - typically 2.5% of a fund - compared to the 1% cap with
stakeholder. They have also been tainted by the mis-selling scandal,
which happened when some people were encouraged to move away from
company plans by commission-hungry sales staff and advisers.
The younger you start the better. One of the main providers, the
Prudential, estimates that a 30-year-old starting a stakeholder plan
this year would need to contribute £160 a month to receive an income of
£20,000 a year at 65.
You do not have to be working to get one but you cannot contribute
more than £3,600 a year to the stakeholder. The amount you have to pay
will actually be less because of the tax incentive. You can take a
stakeholder pension with you if you move jobs and they do not have any
surrender penalties. You can also take out a plan if you have an
irregular income or want to take a career break. Stakeholders can also
be taken out for children. They are money-purchase schemes.
WHO NEEDS IT: People who have no earnings including
full-time mums and carers. Also useful for employees of small firms with
no company scheme.
STATE PENSION
MOST pensioners struggling on the state pension wish they had saved more
while working. Do that while you have the chance. Everyone
gets some basic state pension but do not assume you will get the full
state pension.
Only those with full National Insurance Contribution records do. If you
have been or were out of work for a few years you could miss out. Check
your entitlement and find out how to buy back missed years by contacting
your local DSS office and completing form BR19.
WHO NEEDS IT: All workers, especially those who cannot
afford to make better provision for their retirement.
Its a bit late for us pensioners but for all you younger people:
The clear message is that to get a decent pension you must start
investing early.
That means NOW! “Featured resource:
speak to a pension advisor with
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