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www.InvestmentGuide.co.uk Everyone who has earnings from a job or who is self-employed can contribute to a pension scheme full with tax relief on the contributions.
Once contributions are invested any capital gains and income in the pension fund are tax exempt apart from dividends on shares (and dividends from unit trusts and OEICs derived from shares) which are taxed at 10%.
When you start to draw the pension, you can take a quarter of your pension fund as a tax free lump sum; you can take the rest generally in the form of an income which is taxed as earnings. You don't have to decide which way to receive your proceeds until you are ready to take them.
Because these tax advantages are good, anyone investing towards retirement should do so through one type of pension scheme or another. Only people not eligible for a pension scheme should consider other types of investments. These other methods are summarised at the end of this Chapter.
The State retirement pension
Until 6 April 2010, you got the State pension at age 65 for men and 60 for women. Since 6 April 2010 the retirement age for women is rising and this will affect all women born after 6 April 1950. The State retirement age for men and women is to be equalised at age 65 in 2018.
It has also been announced that the state pension age for both men and women will then rise to 66 in 2020 (previously it was to be in 2024), to 67 in 2034 to 2036, to 68 in 2044 to 2046. Each rise will be phased in over two years. However this is such a long time into the future, the proposals are likely to be brought forward at earlier dates and retirement at 70 is quite probable for those now in their thirties.
You can defer your retirement for up to five years in which case your pension will be 7½% higher for each year you delay (maximum increase 37½%) when you start to draw it. State pensions depend on contributions throughout your working life. Some married women who opted for reduced rate contributions in the past may not be eligible for a full or any pension.
There are two parts to the State pension.
The first is the State flat rate or basic retirement pension which depends on the contributions made by employees and the self-employed. The pension for 2012-2013 is £5,587 a year (£5,311 for 2011-2012) or £8, 836 a year for a couple where the spouse doesn't work and hasn't earned her own State pension (£8,369 in 2011-12).
In order to get a full State pension, people reaching pension age since 6 April 2010 need to have paid contributions for at least 30 years (previously 39 years) and in order to get any pension need to have paid at least one year's contributions (previously 10 years).
The minimum pension is about £1,260 a year. If your other income is less than £16,000 a year you are eligible for pension credit which can raise the amount by about £3,000 to £3,600 a year giving a single person about £8,000 a year and about £12,000 a year for a couple. People on these incomes are also entitled to housing benefit (if they rent) and council tax benefit.
The pension rises each year in April in line with increases in the Retail Prices Index to the previous September and sometimes by a bit more. The Government intends to change the basis in future years to the greater of the rise in the Consumer Prices Index, the Average Earnings Index and 2.5% a year.
The second part, the State earnings related or additional pension (SERPS) is available to employees only.
A SERPS pension can be inherited by a husband or wife when their spouse dies. Anyone who was widowed before 6 October 2002 or reaches pension age before that date inherited the full additional SERPS pension. For people widowed after 5 April 2010, the survivor will inherit only 50% of the pension.
In the 2011 Budget statement, it was announced that the State pension was to be simplified at one fixed rate for everyone. It remains to be seen what this will turn out to be and when it will be implemented.
If you are currently in a job pension there are a number of possibilities:
A job pension
Job, company or occupational pensions are currently optional. That doesn't mean you should necessarily opt out. The decision to leave depends on your age, whether you will stay with the company until retirement, and how good the job pension scheme is. You can get free advice on what to do and what your rights are from (links only work if you are on-line now) the Pensions Advisory Service which is an educational charity. There is also information from the Government Pensions Service. If you have a complaint about a pension scheme consider contacting the Pensions Ombudsman and/or the The Pensions Regulator.
If you decide to stay with your job pension scheme, you can boost the pension you get on retirement by investing in additional voluntary contributions through a Pension In-House Top Up Plan or taking a Personal Pension or a Stakeholder Pension in addition.
If you think you are entitled to a pension from a company you used to work for, but the company has moved or gone out of business, you will be able to use the Pensions Tracing Service. Around 10,000 people a year ask for help and it succeeds in tracing about 88% of these people's pension scheme.
Since 6 April 2006, you can start drawing your job pension but do not need to retire from your job. So you might be able to reduce your hours and go part time with no reduction in income.
A stakeholder pension or a personal pension
Since 6 April 2006 anyone can take a Stakeholder Pension or a Pension Personal Pension issued by a life insurance company, building society, bank or OEIC manager, even if they already belong to another sort of pension scheme. A stakeholder pension is essentially the same as personal pension but with a scale of maximum charges and minimum standards imposed by the Government.
However, once you have committed yourself to a personal pension, you cannot get anything back until you are age 55 (previously 50). You can start to draw your pension under 55 if you become permanently disabled. You cannot receive tax relief on contributions made after you are age 75. However since 6 April 2011, you do not need to buy a pension or start to receive benefits at age 75.
If you are already age 55 you can get an instant pension provided you still have eligible earnings.
The schemes accept single contributions as well as regular contributions both count equally for tax relief. Personal pensions are covered in Part 2 under the heading Pension Personal Pension. However for people who are liable to the 50% tax band, there are restrictions on how much you can invest in a personal pension (since 22 April 2009).
Contribution limits to all pension schemes
If you have no earnings, you can contribute £3,600 a year. Basic rate tax relief is given by deduction so you pay £2,880 and the scheme will be credited with £3,600.
Since 6 April 2006 you can pay an amount up to 100% of your full earnings into all your pension schemes and receive tax relief on all contributions subject to a maximum yearly payment of £50,000 in 2011-2012 and subsequent years (it was £240,000 for 2010-2011). See also this announcement which is in the process of being implemented.
Since 6 April 2011 you can carry forward any unused pension allowance into future years from the previous three tax years. The order of use is first the current tax year, then the earliest missed year and so on. However in tax years when you were not a member of a registered pension scheme, then you are said not to have an allowance in that year; that may mean it could be advisable to start a regular premium scheme at a low premium and top it up when you have the cash. Get advice on this from a pensions company or Independent advisor. The phrase "registered pension scheme" may have a narrower meaning than its seems. The Inland Revenue statement on this is not that clear.
The Government has announced it proposes to simplify the pension rules.
Not eligible for a pension
The following investments are worth considering if you are not eligible for a pension scheme because you are not working:
For regular investment:
For lump sums not needed for 7-10 years or more consider (the latter part of the list is alphabetical):
None of the above have tax relief on the contributions.
When you need to start to draw your pension
Personal pensions are an ideal way of accumulating money towards a pension. You can now start to draw your pension once you reach the age of 55 (since 6 April 2010). The later limit of age 75 has been abolished. You don't have to retire to draw a pension. You have a choice of taking 25% of the fund you have accumulated as cash lump sum and the rest in the form of a pension, taxed at the normal income tax rates, for the rest of your life or the life of your spouse or dependents. If the pension would be very low, you can take it all as a lump sum.
The pension you get will be in the form of a Pension Annuity whose terms are fixed at the time you take it out. It can be for a fixed amount which carries on until you die.
There are lots of different options with a Pension Annuity. Generally speaking each option reduces the initial pension you receive, eg if it is agreed that the pension is payable for a minimum of 10 years even if you die before then, or a lesser amount is paid for the rest of the life of your spouse if you die, or if the pension is linked to the Retail Prices Index etc.
The main thing about a pension annuity is that, subject to the company making the payments staying in business, you are guaranteed not to pay any extra charges or see your return fluctuate.
A possible downside would be if high rates of inflation return, it will erode the value of your pension annuity. So generally speaking the older you are, the less risk there is in buying a pension annuity. However when there is low inflation or none at all (as in 2009) an annuity can seem very attractive because of the fact of mortality drag, see Pension Annuity for more details.
Income Drawdown
(also called Unsecured Pension, Income
Withdrawal or Pension Fund Withdrawal).
You have the opportunity to draw an income from your Personal Pension without committing yourself to a pension annuity . This is called income drawdown. The maximum is 20% more than for a pension annuity; there. is usually no minimum. All the income withdrawn is taxed as earnings. But you are then committed to drawing the income and cannot stop receiving payments or make extra contributions to the same personal pension. However, if later you want to take your cash lump sum, you can do so but at the same time you must convert the remainder of your fund to a pension annuity, using the open market option if you wish.
Any balance of the income drawdown fund or alternatively secured pensionleft on your death will form part of your estate but will not generally be liable to inheritance tax but will be liable to a 35% income tax charge if it is distributed as a lump sum. Alternatively there are options for your spouse or dependents to take out a pension annuity themselves.
Open market option for pension annuities
When you finally want to draw your pension, you should shop around, using the open market option to reinvest your pension money with the life insurance company offering the best pension annuity rates (sometimes called compulsory purchase annuity) available at that time.
However, before you do so, check whether your company has a guaranteed minimum annuity rate for your contract. If it does, you may or may not find this is higher than the rate being offered both by the company itself and its competitors; make sure the company does not penalise you in some other way if you request this guaranteed minimum.
Open market option annuity rates vary according to the age when you start them. You can get the annuity guaranteed for 5 or 10 years - in which case you get less to begin with.
You have the option to take 25% of the accumulated pension fund as a tax free lump sum which you will probably want to invest separately elsewhere to obtain a better return. A Life Insurance Annuity may give a better return than a pension annuity because part (and possibly most) of a Life Insurance Annuity is regarded as a return of capital and is tax exempt.
Start receiving pensions at different times
If you have several personal pensions with different companies, you can start to receive pensions from them at different times. Some companies offer personal pensions as segments where you can start to draw a pension from each segment at different times. See also protected pensions below.
Another option to consider is an increasing pension annuity, either by a fixed amount, linked to the Retail Prices Index or on a with-profits basis. The different incomes you would currently get from these at different ages are shown in the table below. The actual return of all these types of pension varies depending on the level of interest rates at the time you start to draw the pension.
Impaired lives annuities
Finally if you are not in tip-top health when you start drawing your income, some companies offer impaired lives annuities or if you are not so ill, life style annuities. Life style annuities are easier to obtain because you just have to fill in a form whereas for impaired lives annuities, you will probably have to have a medical. In these cases, unlike life insurance, the life the insurance company thinks you are, the better rate they will give you. Life style annuities are available if you have smoked 10 or more cigarettes a day for 10 years or more, you suffer from hypertension, high cholesterol, obesity, diabetes, stroke, heart attack, kidney failure, certain cancers, by-pass operation or multiple sclerosis. Around 40% of people aged 60-65 can qualify for an increase of 5% to 10% on the rates they would otherwise get.
Protected pensions
Since 6 April 2006 if you don't like the idea of having a lifetime annuity, you can protect your pension if you die before age 75 with an annuity protection lump sum death benefit.
You will also be able to use part of your fund to buy a fixed term annuity lasting up to five years. After which you can buy another fixed term annuity or a life time one. This option is available up to age 75.
Small pension funds
If the total of all your pension funds is less than £15,000, you can convert all the pensions to a cash lump sum when you are aged 60 or over. You have to cash all the policies within a six month period. A quarter of the proceeds is tax free and the rest is taxed as income.
 Last updated 7 January 2012 |
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