Pensions / Annuities
Time was when many people relied entirely on a state pension to fund their retirement, but times have changed; currently the Basic State Pension is £95.25 (2009/10 tax year) for a single person, whilst the Basic State Pension increases each year, it does not increase at the same rate as income. Meaning an ever widening gap between earnings before retirement and the state pension.
"Saving for retirement is essential if you're going to be financially comfortable when you stop working. What's more, the government wants us to save for our retirement, so they grant generous tax breaks on pension contributions:
Basic taxpayers receive tax relief at 20%
Higher rate taxpayers receive relief at 40%
What this means for most taxpayers, a £80.00 contribution to a pension plan will attract a £20.00 contribution in the form of tax relief from the Inland Revenue. For a higher rate tax payer this means for every £60.00 invested, the tax relief will be £40.00.
What kind of pension scheme should you choose?
The idea of you contributing to a personal pension scheme is that when you retire, it should pay you a regular amount sufficient to ensure your life remains financially comfortable. What kind of pension you choose depends on your personal circumstances, especially whether you're employed or self-employed:
If you are employed and your employer runs a works pension scheme (known as an Occupational Pension Scheme), it's a good idea to join the scheme and make a contribution yourself (usually deducted from your wages). Usually, your employer will make contributions too.
If you are employed and your employer does not run a pension scheme - you should consider a Stakeholder Pension Scheme or a Personal Pension Scheme. Your employer might even contribute to your own personal pension scheme.
If you are self-employed, again, you should consider a Stakeholder Pension Scheme or Personal Pension Scheme.
Alternatively you may choose to invest in a pension which enables you to choose your own investments such as a Self Invested Personal Pension (SIPP).
Stakeholder Pensions became available from 6th April 2001. Stakeholder pensions are basically money purchase arrangements, similar in many respects to current personal pension arrangements. The Government's proposed aim is a pension arrangement that is simple to understand with low charges.
Schemes have to meet certain minimum standards to be granted stakeholder status. The minimum standards relate to:
Eligibility Stakeholder plans are available even to those not working and the under 16's
Contributions the minimum premium for a Stakeholder plan is £20.00 per month
Charges the annual management charges on a Stakeholder contract must not exceed 1.5% per annum
Transfers there must be no penalty to transfer the contract to another provider or penalties imposed if contributions cease early
Personal Pensions on the 6th April 2006 heralded a complete overhaul of the pensions system in the UK, a change that has affected every single type of pension policy. Until 6th April 2006, the regime governing your pension plan depended upon the type of policy you have! From now on, all that has changed, one set of rules apply to all, and everything is now supposed to be simple?.
There will be a lifetime limit on a pension fund which can be built up under pension arrangements. This will cover all rights under all pension arrangements to which an individual belongs. This limit will be indexed, generally in line with prices. If the lifetime limit is exceeded there will be a tax charge on the excess, how much depends on what you want to do with it! For this tax year (2009/10) the lifetime limit is £1.7 million, rising to £1.8m in 2010/11 and reviewed every 5 years thereafter.
Individuals will be allowed to contribute up to 100% of net relevant earnings or £3,600 each year if higher, with tax relief on contributions subject to a maximum of £245000 for the current tax year 2009/10, rising to £255k in 2010/11 thereafter being reviewed every 5 years.
Retirement benefits will be available only from age 55 from 2010 unless you are in ill-health (as determined by the scheme rules).
Up to 25% of the fund can be withdrawn at retirement, tax free.
Tax free cash can be taken, without the need to ever purchase an annuity.
Annuities
Pension income in retirement is known as an Annuity. An annuity will provide you with a guaranteed level of income, which is determined by the amount of capital you have to invest either from a pension policy or from your savings.
When you reach your selected retirement age many people, wrongly, assume that they have to take their pension from the Company that they have paid their contributions to. It is possible to increase the level of pension that you can receive in retirement by exercising what is known as an Open Market Option (OMO), instead of just buying your annuity from the company that has your pension fund. This facility can prove invaluable especially if it enables you to receive a higher level of income in retirement that is payable for the rest of your life.
On reaching your selected retirement date you will receive final verification of the value of your accumulated fund. Your pension provider will also confirm the level of annual pension or annuity they are willing to provide you, based on their current annuity rates. There should also be another figure provided by your pension provider and this is the "Open Market Option". This figure should match the fund value and is the amount that will be paid by your pension provider to another annuity provider in order for you to obtain the highest level of income possible in retirement.
The annuity market is very competitive and the rates differ between companies. You can substantially increase your pension income by purchasing your annuity from the company which pays the most income. This is called "Exercising the Open Market Option". It costs nothing to take advantage of this option and new rules introduced recently by the FSA means that insurance company must tell you about this option. Check out the best annuity rates by contacting me.