Retirement Planning

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

That’s pretty much the prospect unless you make additional pension arrangements either by setting up a personal pension or by being part of a company scheme.

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.

From our experience, working with our clients, we have discovered that most people who invest their hard earned money in a pension plan are frustrated by its performance. They are also worried that their pension plan will not generate enough income to fund a comfortable retirement.

Our research shows that investors have a right to be worried. Many pension plans are underperforming because they are not given the attention they deserve. The danger is that if your pension plan is not managed properly, you may not achieve financial security in the future.

Approximately 80% of all pensions reviewed are found to be under-performing and in many cases yield less than a third of the potential offered.

Perhaps it might be an idea to hedge your bets and start doing something about it now?

There are a number of pension schemes to consider:

• Pensions
• Serps – State Earnings Related Pension Scheme
• Second Pensions
• Personal Pensions
• Stakeholder Pension

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.

Pensions

For people who have worked and paid sufficient relevant National Insurance contributions, there is the basic state pension. The basic state retirement pension or ‘old age pension’ as it is commonly known is not really sufficient to provide anyone with a comfortable retirement.

SERPS (State Earnings Related Pension Scheme)

Until April 2002 only employed persons paying sufficient National Insurance Contributions qualified for SERPS. On 6th April 2002 the State Second Pension (S2P) replaced SERPS with any existing SERPS entitlement being protected.

S2P (State Second Pension)

The S2P is intended to provide a more generous state pension for people on low or moderate earnings and for carers and people with a long term illness or disability. Like SERPS, the self-employed will not be entitled to S2P benefits at retirement.

An occupational pension scheme is a pension which may be offered by an employer. Some schemes do not require you to contribute, others do. Under current rules you do not have to join your employer’s pension scheme (this is under review by the Government) but as the employer will be responsible for many of the costs associated with setting up a plan, it is usually advisable.

If you join your employer’s approved occupational pension scheme, they must contribute as well. Many occupational pension schemes offer additional benefits such as life cover, which may be worth up to four times your salary.

Life assurance pays a lump sum to your dependants were you to die before retirement and is included in many employer schemes, often complemented by a pension for your widow/er or other dependants. The possibility of retiring early may be an option, but this will normally be on a reduced pension. Both ‘final salary’ and ‘money purchase schemes’ are types of ‘occupational’ schemes.

The pension is taxable when it is paid, but may be linked to inflation and thus increase annually once you start receiving it. Many schemes also pay out a lump sum, which is currently tax-free, when you retire.

A ‘final salary’ scheme gives the members a commitment to pay them a pre-defined proportion of their final salary upon retirement (a ‘defined benefit’). This depends on a number of factors, such as the time you have worked for the employer, the time you have belonged to the scheme and your earnings in the period just before you retire. For example, you may receive 1/60th of your final salary for each full year you work for your employer and are a member of the scheme.

With a money purchase scheme your contributions are invested for you into a specific share of the pension fund. A fixed rate of contribution is set, usually a percentage of salary. Contributions continue as long as an employee remains a member of the scheme. The contributions are invested by the trustees of the scheme with the aim of increasing over the years by the addition of interest, bonuses, growth of unit prices, etc – depending on the way the money is invested. The fund built up for each individual employee is then used to provide a pension and other retirement benefits at pension age.

The level of retirement pension depends on the total amount paid into the scheme for each employee, the investment income received and the annuity rates when you retire. Employees who change jobs regularly, who suffer redundancy and periods of unemployment, who wish to retire early, or who take career breaks for whatever reason (to look after children or dependants for example) may find that their pension provision is inadequate.

Additional Voluntary Contributions (AVCs) provide ‘top up’ pension entitlement. Sometimes these extra payments purchase ‘added years’ to a final salary arrangement, sometimes they are invested to produce a fund available to increase the income at retirement.

Employers may offer such a facility ‘in-house’ through the company pension scheme. Alternatively, employees may contribute to a Free Standing AVC scheme with an insurance company. This supplements an occupational scheme, but is private from your employer. It is also possible for certain individuals in occupational schemes to contribute to personal pensions under the concurrency rules.

Personal Pension

A personal pension is an option if you are self-employed or your employer does not run a company scheme. A personal pension plan charges the individual for setting up the plan, unlike an occupational pension scheme where the employer often pays the charges. The effect of charges can be significant and erode the value of your plan, especially if you have to stop, start or suspend premiums or change the selected retirement age that you originally applied for.

Stakeholder Pensions

Stakeholder pensions are personal pension plans which meet certain statutory requirements. For example the provider‘s charges may not exceed 1% annually of the fund value and there can‘t be any transfer penalties or exit penalties. Whilst there is no minimum level of contribution, product providers can refuse to accept premiums below £20 (whether as a single, annual or monthly premium). Most employers have to provide access to a stakeholder arrangement via the workplace. Some do not and these include employers whose existing pensions arrangements meet (or exceed) specified criteria and those who do not employ sufficient staff.

Personal pensions are built up on a money purchase basis. This means that the level of pension depends on the amount of money paid in, the investment income received on that money and the cost of buying the pension at retirement. The size of your pension fund at maturity depends on how well the underlying assets performed. You can choose from two basic fund types: with profit and unit linked . At retirement date up to 25% of the money built up in this way can be taken as a tax-free cash sum. The rest of the money is used to buy a income from an insurance company.

The monies paid into the scheme are invested with a pension provider such as an insurance company, friendly society, bank or building society. When you retire, payment of the pension is normally arranged through an insurance company.

Pensions are intended as long term investments. The equity based ones are dependent on stock market movements. This means your capital is not usually guaranteed to be safe and so you may lose some or all of it.

If the investment is a unit-linked one, its value can reduce in direct relation to the stock market prices of its underlying assets, although it can also rise. This means you may not get back all the money you invested. If it is a with-profit arrangement, there is not the same direct link between the underlying assets and the value of your policy. This is because the insurance company holds back some profit from good years to offset losses in poor ones – this is referred to as smoothing. The provider cannot withdraw any reversionary bonuses declared, although your early withdrawal may result in a Market Value Adjustment – effectively a financial ‘penalty’.

Levels and bases of, and reliefs from, taxation are subject to change and any tax reliefs referred to are the current ones and their value will depend on the circumstances of the individual investor.

Why not contact us for a more detailed analysis of your requirements. Also Click here to see more about Annuities.