How do you fancy the idea of living on about £100 per week when you retire?

That's pretty much the prospect facing you with a state pension unless you make other pension arrangements via a personal pension plan or by being part of a company pension scheme. It seems unfair that for most people the biggest holiday of their lives (retirement), is accompanied by the least amount of income they’ve ever had.

It is never too early to start planning for your retirement! The younger you start making pensions contributions the more time your pension fund has to build up, just by starting a few years earlier can have a huge significance on your retirement lifestyle.

There is some Good News.. you get fantastic tax benefits!!!! If you are a basic rate taxpayer, you can have £100 put into your pension fund and only pay £80. This is because the Government tops it up for
you……..

Don’t rely too much on the state!

You will basically be entitled to a basic state pension as long as you have made national insurance contributions (NIC) during working life, to get the maximum pension you must have contributed for 44 years (men) or 39 years (women). It is only designed to provide a basic standard of living, but there is a Potential Problem.. there is no actual state pension fund, this is because the government operates a ‘pay as you go’ system. This means today’s workers (via national insurance contributions) are paying for today’s state pensions.

The problem.. on average, people are living longer and the ratio of workers (making NIC) to pensioners (receiving a pension) is constantly reducing. Therefore the amount being raised (NIC) is reducing yet it will need to pay an ever increasing pool of state pensions, this is known as the ‘demographic time bomb’.

Don’t leave it to chance, take your retirement into your own hands

If you forget about the state pension and make alternative arrangements to provide for your retirement needs, you can view anything you do get from the state as a bonus.

The main types of pension (other than the state pension)

• Occupational Pension – usually referred to as a company pension scheme and something worth seriously considering if your employer contributes to the scheme. In addition to this you may get other benefits such as death in service, ill health and tax free cash at retirement.
  • Final Salary schemes where your pension will be a combination of your final or average salary and the number of year’s service.
  • Money Purchase scheme where the contributions are invested to buy a pension on your retirement.

• Personal Pension – your contributions are invested by the pension provider and you can usually have a choice of investments. Your pension fund is then used to purchase an annuity at retirement. You can choose to make regular contributions or whether to make a one off payment e.g. an inheritance.

• Stakeholder Pension – these are a special type of personal pension the government introduced in April 2001. They are intended for those earning under £30,000 with no access to an occupational pension, however, they can be taken out by people who don’t work and by most who have occupational pensions. They are designed with flexibility in mind as you can use it on its own or to top up a company or personal pension. The scheme rules allow you to contribute for a child or grandchild, then they can take over from the age of 18

Always Review your Pension arrangements Regularly

However you are planning for retirement, it is vital to keep your pension plans under close scrutiny with at the very least an annual review. Many people often start pension schemes and stop contributing for one reason or another, or never get a second opinion to see if they are getting the most from it.

Reviews are especially important for pensions where future benefits are determined by fund growth. What may be a great performing fund one year may not be the next. Don’t just leave it to chance, get a regular professional opinion to see if you can get more by switching to other providers/funds, it’s a simple paperwork process to transfer if required.

Free Initial Consultation
If you would like a Free initial consultation with Darren to discuss Pensions or review your existing Pension arrangements, call us on 01522 540555 or simply fill in the enquiry form

Pension Questions & Answers

• Will I have enough money to retire?
• How Soon Should I Start Saving?
• How do I use my pension to create an income at retirement?
• Where can I obtain a stakeholder pension?
• Should I transfer my existing pension fund into a stakeholder?
• Should I top up my company scheme with a stakeholder or an additional voluntary contributions (AVC's) plan?
• When can I take the benefits?

Will I have enough money to retire?

For a comfortable retirement, you need a large and growing source of income. This may come from a variety of sources, such as a pension fund which buys an annuity, rental income from property, the interest from savings, share dividends and so on. So retirement income does not necessarily have to come from a pension, but a pension can play a central role within your overall retirement strategy.

To work out how much income you will need, think about the sort of lifestyle you will want in retirement - lots of holidays, pursue your hobbies and spend more time with family and friends.
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How Soon Should I Start Saving?

Quite simply, the sooner you start saving the better because that way your hard earned savings will have longer to grow. By starting to save in your 20s, you could accumulate a pension fund of £1M by the time you are 65. If you leave it until you are in your 40s, you would have to save a huge proportion of your disposable income.

To protect your dependants, you can buy life assurance along with your pension, but it is much cheaper to buy term assurance separately for the period you need to protect your dependants.
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How do I use my pension to create an income at retirement?

By purchasing an annuity at retirement which pays you an income for life in return for a lump sum (your pension fund). You have the right to take your pension fund to any annuity provider in the market under the 'open market option'. Therefore, you are able to seek out the best rate for the type of annuity you require. You are not limited simply to accepting the annuity offered by your pension plan provider.

Annuities can be taken in different forms: on a single life, joint life, escalating (increasing with earnings) or RPI-linked (rising in line with inflation) basis. Plan carefully, because the decision to purchase an annuity is not easily irreversible - once you have bought an annuity, it is usually for life and you may not generally change your mind and switch to a different provider later.

The level of income you receive will depend on a number of factors including: your age, sex, life expectancy, state of health, where you live and prevailing annuity rates. E.g. lets say the average annuity rate for a male, single life annuity is around 6%, so if you have a £100,000 pension fund, a 6% annuity rate will provide an income of £6,000 per year before tax.

You don't have to buy an annuity immediately when you retire although you must use the remaining balance of your pension fund to do so by the time you reach age 75. You have a choice of buying an annuity or drawing an income from your pension fund while leaving the bulk of the money invested.
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Where can I obtain a stakeholder pension?

It can be bought by an individual through a bank, building society, insurance company, investment company or financial adviser. They are also being sold through companies with a workforce of at least five. By law, companies with a staff of five and more and no other occupational pension scheme are required to have an arrangement with a stakeholder provider to offer staff access to a stakeholder pension. However, companies are not required to contribute to the employee's stakeholder pension.
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Should I transfer my existing pension fund into a stakeholder?

Whether you switch an existing personal pension into a stakeholder, depends on the penalties imposed by your existing provider. If you took out a personal pension in the last few years, you could find that you are still paying initial costs and could be penalised for closing the plan. However, if you have an older pension many of the charges would have been front-end loaded and often charges, especially on single premium pensions, may be low and it may be worth switching.

You should get advice from an independent finance adviser before doing anything. You will have also to weigh up the cost of getting financial advice against the costs of moving and the benefits gained.
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Should I top up my company scheme with a stakeholder or an additional voluntary contributions (AVC's) plan?

AVC's have been traditionally used as top up schemes for those in occupational schemes. Unlike the stakeholder, they do not offer tax free cash and require you to use the fund to buy an annuity.

If you can afford to, you could contribute to your main company scheme and an AVC scheme or personal pension or stakeholder. Thanks to the changes brought about by ‘Pensions Simplification’ tax free cash is now available on these plans and an individual can pay up to their annual net relevant earnings into the plan and gain tax relief on the whole amount.
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When can I take the benefits?

You can choose to take the benefits from any age between 50 and 75, (55 from 2010 onwards). Up to 25% can be taken as a tax-free cash run and the rest is used to provide you with an income during your retirement. This can be done by buying an annuity from a life assurance company or drawing income out of your fund through a process known as income drawn-down. There are now a number of newer and more flexible annuity and income draw-down schemes and you must seek financial advice before making any decision about your retirement income.
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Free Initial Consultation
If you would like a Free initial consultation with Darren to discuss Pensions or review your existing Pension arrangements, call us on 01522 540555 or simply fill in the enquiry form