Retirement
Retirement and Pensions
Do you fancy the idea of living on £102.15 per week when you retire?
Thought not. However, that's the full basic state pension for 2011/12, and not everyone gets that ! Sadly for the majority of UK workers that's pretty much what they have to look forward to unless they make private arrangements, either by setting up a stakeholder pension, a personal pension or by being an active member of that increasingly rare species, a company pension scheme.
We also have advice on;
Before seeking advice on pension requirements or retirement planning in general it's worth getting a handle on these basic options first.
Stakeholder Pensions
The government introdcued Stakeholder pensions in 2001 as a low cost alternative to what were perceived as the "expensive" personal pensions available at that time. Although not hugely succesful in themselves they did put downward pressure on pension costs generally, to the extent that there are now many low-cost pension products available in the market place. They are especially attractive to those on lower incomes, making smaller contributions, who just want to get a foot on the "pensions ladder".
As with all pensions the key is to start contributing as early as possible and keep increasing contributions whenever you can. That way your pension pot has time to grow and benefit from the mathematical miracle that is compound growth (interest on interest). If you stick with it you will generate a decent sum of money with which you can generate an income in retirement.
Personal Pensions
As mentioned above, one of the positive side affects of Stakeholder pensions is that they have made a great many of the products in the market place a great deal cheaper and more efficient. Personal pensions tend to have a few more "bells and whistles", in particular access to a wider range of available funds than stakeholders. If you think it likely that you will benefit from these additional featuresthen PP's are for you. As with stakeholders, under the latest rules, although you may not have to purchase an annuity before age 75, only 25% of you fund can be taken as a tax-free cash lump sum.
Probably the top attraction of both Stakeholder and Personal pension schemes as a method of saving for retirement is that there is tax relief on contributions (up to government set contribution limits). Very few other investments will give you 20% or 40% tax relief (possibly 50%, depending on the highest rate of tax you pay) on all your contributions.
So, pay tax to the government or save it for your old age? Finance your own pension, or finance everyone else's pension ?We've all made more difficult decisions than that !
Occupational Schemes
An increasingly rare beast, due to the enormous cost of running them, occupational schemes (sometimes called company schemes) are set up by employers, for their staff. They provide a pension related to your "final salary" and are known as "defined benefit" schemes. With such schemes a Trust is set up for the members, money is paid in from the company, the members, or both. That money is then invested with a view to producing a defined benefit at your normal retirement date.
The benefits are usually in accordance with your contractual terms (typically 1/60th of the final salary for each year that you have worked there). There is usually an option to commute some of the pensions by taking some of the money as a cash lump sum on retirement.
The fund is monitored by actuaries, who monitor whether there are enough assets to meet the pension liabilities. If the fund is doing well, the company, even the employees, might be able to reduce or stop their payments. If the scheme does badly (i.e. its investments fall in value) then the company is expected to make up the shortfall.
More commonly these days, employers may set up a "defined contribution" or "money purchase" scheme. In this case the monthly contributions are put into a fund earmarked for that particular employee who, when he or she retires, is able to take a tax free lump sum and, with the balance, buy a pension income, known as an annuity. If the scheme does badly (i.e. its investments fall in value) then the individual is expected to make up their own shortfall. Effectively, the risk has been transferred from the company to the employee.
"Seems like your pension planning advice is best, that from a commercial solicitor based in the City of London !”.
Dr J. L. Gloucestershire
