Pension Planning

Personal Pension Plans (PPPs) were originally designed for the millions of employed & self-employed individuals who did not have access to a company pension scheme.

Introduced in July 1988, they were part of a government push to extend pension choice & encourage those people not in company schemes to build up a retirement fund; one that could cater for their retirement needs more realistically than the state. Many financial institutions offer PPPs, though most are run by the large insurance companies and banks.

We can research the whole market on your behalf to find a suitable pension plan, it may be that a PPP meets your needs for retirement provision. Following the sweeping changes made on the 6th April 2006 to pension legislation (see section on Pension simplification) these contracts are very flexible and can allow contributions to be made of up to 100% of your earnings. Furthermore these plans can be set up for non-working spouses and even children and grandchildren where up to £3600 can be invested annually. (The annual allowance and Lifetime allowance applies)

How they work

Unlike some company schemes, all personal pensions work on a ‘money purchase’ basis. This means that the money you save each month or each year into your Personal pension plan is invested (typically in investment funds) and is then used at retirement to provide you with pension benefits. So in theory the more you save the better your pension should be at retirement.

At Retirement

On reaching retirement, you use the money that has built up in your personal pension to purchase pension benefits, these benefits can be taken in the form of either income or income with a tax free lump sum (The Pension Commencement Lump Sum). Or the benefits can be transferred to another type of plan which provides unsecured pension benefits (see section on Income Drawdown / Pension Fund Withdrawal), these types of plan allow additional flexibility in that pension benefits can be drawn whilst your pension fund remains invested.

The value of your pension at retirement is mainly dependent upon:

  • How much money you've paid in over the life of the plan
  • How well the money has grown
  • The annuity rate that the provider applies to your pension fund (if you choose to take an annuity)
  • Level of Pension Commencement Lump Sum taken. (Up to a maximum of 25% of your pension fund can be drawn as capital)
  • The charging structure of the plan

So a Personal Pension Plan is really just a long term savings plan (albeit a very tax efficient one) that is designed to produce a fund at retirement.

At retirement provision can be made to protect your pension from the eroding effects of inflation, protect your income in the event of your death and make provision for your spouse or dependants. Benefits can currently be drawn from age 55 onwards.

Stakeholder Pensions

A Stakeholder pension is a form of low cost Personal pension aimed at encouraging those people who do not currently have pension provision to save for their retirement. They became available on 6th April 2001. They are not a form of state pension.

In order to reach as wide an audience as possible, Stakeholder pension schemes are intended to be flexible and easy to understand. Employers with 5 or more employees have had an obligation to provide their employees with access to a stakeholder pension scheme since 8th October 2001, although it is not compulsory to save for retirement with a Stakeholder Pension plan or any other savings related product.

Stakeholder pension plans are privately managed and funded but must operate within a standard framework laid down by the Government.

Stakeholder Pension plans are very similar to Personal Pension plans; they are individual pension arrangements, meaning that they are personal and portable - you can take them with you if you change jobs.

We can research the Whole market on your behalf to find a suitable Stakeholder Pension plan, it may be that a Stakeholder Pension plan meets your needs for retirement provision. Following the recent sweeping changes made on the 6th April 2006 to pension legislation (see section on Pension simplification) these contracts are very flexible and can allow contributions to be made of up to 100% of your earnings. Furthermore these plans can be set up for non-working spouses and even children and grandchildren where up to £3600 can be invested annually.

An important aspect of the ‘no penalties’ rule in relation to these types of pension plan is that you don’t have to delay starting a plan until you find the right provider. You can start a plan straight away. If the provider doesn’t perform as well as you expect, you can simply take your fund and transfer it to another provider, without penalty. Another big plus for Stakeholder pensions is that providers must allow a minimum premium of £20. This provides much needed flexibility compared to other Pension contracts where minimum premiums may be higher; furthermore there is flexibility to stop and start contributions with unlimited frequency.

Company Pensions

Employers' pension schemes, Superannuation, Occupational schemes - defined benefit schemes / defined contribution schemes, Company pensions....... all refer to Employer related pension schemes.

A good proportion of the UK’s working population are members of a company pension scheme. Occupational pension schemes are those run by your current or former employer/s. These come in two basic types: defined benefit, where the benefits paid in retirement may be based on a combination of your age, length of service and the pensionable salary you are paid just before you retire - your final salary; defined contribution, also known as money purchase, which will pay out an amount based on the size of the fund, into which your contributions have been invested, at retirement.

Group Personal Pensions are becoming more popular with employers, these are low cost personal pension plans bought by groups of employees under the auspices of their employer. The latter are personal pension schemes organised as a group to share lower costs of administration. (See section on Personal Pensions)

Your employer may make a contribution to your occupational pension scheme in addition to deducting a percentage of your salary and paying it into the scheme. You may make extra contributions to your occupational scheme to boost your pension provision up to a maximum of the maximum limit (annual allowance), tax relief is available on pension contributions of up to 100% of your taxable earnings. (You may contribute more than your taxable earnings but no tax relief will be given on payments above that amount).

Eligibility

Eligibility to join a company scheme varies form company to company. Some allow their employees to join either straight away or very soon after joining the company, whilst others put in place conditions before an employee can join, such as a minimum 2 years of service, or upon reaching a certain age.

The two main types

There are two main types of company scheme, final salary & money purchase . They differ greatly in what they offer and how they work. At present, final salary schemes are the most common in terms of number of members, but many large firms are now switching over to the money purchase type because they are cheaper for the employer to fund.

Annuities

Annuities are used to provide a pension income, in the case of pensions this income is guaranteed for life. The pension lump sum is exchange for a pension income. Once the annuity has been bought, the income is fixed, the contract cannot be reversed - the pension lump sum becomes the permanent property of the annuity provider.

The level of income that you will receive from an annuity depends upon several main factors:

  • The level of Investment
  • Age of 'annuitant'
  • Health
  • Sex
  • The prevailing annuity rates at the point of annuity purchase

In general, the older an annuitant the higher the income which can be secured. Furthermore males usually receive a higher income than females due to generally have a shorter life expectancy.

How they work...

Annuities, in the main, are supplied by Life Assurance Companies. The underlying 'annuity fund' is usually invested in fixed interest investments, such as long term government gilts in order to maintain the guaranteed income and ensure regular income payments are made to annuitants.

Annuities can be set up to provide different benefits / options:-

  • Spouses pension (to protect a spouse, by providing an income, following the death of the annuitant)
  • Guaranteed payment periods; 5 years is typical but 10 year guarantees are possible
  • Escalation of benefits; income can be protected from inflation - RPI linked escalation, alternatively a fixed % annual increase in income can be secured at outset e.g. 5%.
  • Annuity income can be linked to investment performance for example by a 'With Profit Annuity' or 'Unit Linked Annuity'
  •  

Phased Retirement

Phased retirement, (also known as 'staggered vesting'), allows the purchase of a pension to be phased, thereby allowing flexibility when considering retirement.

Phased Retirement plans achieve this flexibility by periodically encashing segments of the plan to produce pension income. These plans are usually split into many individual segments, perhaps a 1,000 or more, to assist the process.

Each year the level of required pension income is determined, this subsequently determines the number of segments which must be encashed to meet the income need. The annual pension income is composed of a combination of tax free cash and annuity from the individual segments. The remainder of the fund remains invested and may benefit from any market growth in its underlying investments.

These plans are available up to the plan holders 75th birthday, at which point the remaining segments must be converted into either pension annuity income or transferred to an Alternatively Secured Pension plan.

Phased retirement plans tend to carry higher management charges and due to their nature are usually only considered suitable for clients holding pension assets in excess of £100,000. One other drawback of these types of plan is that the Pension Commencement Lump Sum (tax free cash) is not available on vesting the pension benefits into the Phased plan. The tax free part of the encashed segments form part of the annual pension income. (Any remaining tax free lump sum is not available until the final vesting of the remaining segments).

Phased Retirement plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given to an individual’s personal circumstances, including the value of their existing pension/s. We strongly recommend advice from us be sought if you are considering this option.

Pension Fund Withdrawal

Pension fund withdrawal (also known as Income drawdown) is an important retirement option worth considering, particularly for individuals who have pension capital of at least £100,000.

Pension Fund Withdrawal plans were introduced following changes to Pension law in 1995. The changes removed the previous requirement to purchase an annuity at retirement. Pension Fund Withdrawal allows an income to be taken directly from the pension fund itself.

Pension Fund Withdrawal enhances the flexibility in that annuity purchase can be deferred until a time when it may be more suitable. Most of the major insurance companies now offer 'Income Drawdown' plans. These plans still allow up to 25% of the retirement fund to be taken as Tax Free Cash.

Income levels are determined by reference to annuity tables produced by the governments' actuarial department. The maximum income allowable is 120% of the highest level of income determined by the annuity tables, the minimum income which can be taken is nil. These limits allow further flexibility and so perhaps enable full retirement from a working life to be gradually phased in. These plans are categorised as 'unsecured' pension plans, eventually an annuity will need to be purchased, usually by the age of 75, although there is now a further option for individuals reaching the age of 75 years to consider - the purchase of an 'Alternatively secured pension' plan.

Pension Fund Withdrawal plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given to an individual’s personal circumstances, including the value of their existing pension/s. We strongly recommend advice from us be sought if you are considering this option.

Alternatively Secured Pensions

The Alternatively Secured Pension (ASP) was introduced as part of the simplification regime. The alternatively secured pension is only available from age 75 and is a form of Pension Fund Withdrawal. It was introduced as an option for those that object to purchasing an annuity due to religious beliefs. These plans work in a similar way to Pension Fund Withdrawal plans, but with the following differences:-

  • A minimum income requirement of 55% and a maximum of 90% of the appropriate Government Actuarial Department (GAD) rate for an annuitant aged 75.
  • Any payments that fail to comply with these limits will incur a 40% tax charge on the difference between the minimum income limit and the amount of income withdrawal paid during that year.
  • Reviews to set the maximum income limit must be undertaken annually, but the annuity rate used must continue to be based on an age of 75, rather than a member's actual age.
  • Funds remaining on the death of the member must first provide for any financial dependants and thereafter can be given to a charity with no tax liability. Any surplus beyond this would be subject to a tax charge.

Alternatively Secured pension plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement in later life, particularly if annuity purchase is not an attractive option (for whatever reason). Careful consideration must be given to an individual's personal circumstances. We strongly recommend advice from us be sought if you are considering this option.

Alternatively Secured pension plans are currently being reviewed by the new coalition government.

Pension simplification

On the 6th April 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UKs' Pension tax regime. The new simplified regime is largely a replacement of the past pension framework as opposed to the addition of another layer of legislation. Many changes were introduced, some of the main ones are as follows:-

Introduction of a Lifetime Allowance

Each member of a pension scheme has a maximum permitted tax-exempt fund at retirement. This Lifetime Allowance is currently £1.8 million per person (2010/11 tax year).

Contributions & The Annual Allowance

There is now an annual pension input allowance, (known as the Annual Allowance) set at £255,000 (for the 2010/11 tax year), for all pension schemes. An individual can now contribute up to 100% of their earnings or £3,600 whichever is the greater.

Pension Commencement Lump Sum (Tax free Cash)

The maximum Pension Commencement lump sum (Tax Free Cash) from any pension arrangement is 25% of the value of the pension rights.

Retirement Age

The concept of a normal retirement age is less definite than it was in the past, members of pension schemes can choose (within certain age ranges) when to take their benefits, making the process of retiring more flexible. With effect from 6th April 2010. the minimum age for drawing benefits is 55.

Death Benefits

The maximum lump sum death benefit is simply equal to the lifetime allowance, so currently this is £1.8 million. (There are transitional provisions made in respect to some of these key areas of planning and in respect to over-funding the government have introduced some tax charges.)

Drawing your pension

Retirement income is now classified under 4 main headings:-

1) Scheme Pensions - typically, drawing your income directly from your employers occupational pension scheme.

2) Lifetime Annuities - taking your income as an annuity. Commonly associated with drawing income from Personal pension / Stakeholder pension type schemes

3) Unsecured Pension - Pension Fund Withdrawal / Income Drawdown and Phased retirement

4) Alternatively Secured Pensions - A type of income withdrawal that is only available from age 75

These are some of the headline changes to Pension legislation. The rules are quite detailed and affect different people in different ways, so to see how the changes may have affected you please contact us on 01227 713 845.

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