Pensions
In order to ensure that you do not retire solely on the State Pension,
it is vital that you make other pension provision, either by being
part of an occupational scheme with your employer, if one is available,
or by taking out a Personal Pension or Stakeholder Plan. In order
for you to come to the decision most suitable to you, it is advisable
that you seek independent advice.
Occupational
Pensions - These schemes are set-up by employers for their employees.
In the case of the Final Salary Scheme, otherwise known as Defined
Benefits Scheme, the employer or both the employer and employee pay
into the scheme on a monthly basis. When the employee retires, he
or she will receive their pension based on the number of years service
with their employer and their pensionable salary at or around retirement.
The other type of Occupational scheme is known as Money Purchase or
Defined Contribution. With this scheme, monthly contributions are
invested into a fund allocated for that particular employee. When
he or she retires the employee can take a tax-free lump sum and pension.
Actual returns are dependent on the value of the fund at retirement:
fund values are not usually guaranteed and can fluctuate, due to changing
stock market conditions.
Personal/Stakeholder
Pensions
- Self-employed people will have no option but to set-up their own
pension scheme. As with Defined Contribution or Money Purchase schemes,
regular contributions are invested into the Pension scheme during
the planholder's working life. The fund is then used to purchase an
Annuity on retirement. If a tax-free lump sum is taken, a planholder
will receive a lower Annuity.
At
present, pension plan contributions have the advantage of receiving
tax relief: basic rate tax relief is normally added to the contribution
and higher rate relief, if applicable, can be claimed annually in
the Self Assessment process. No other method of saving can attract
such tax breaks.
The
Government introduced Stakeholder Pensions in 2001. These carry very
low charging structures, in line with government guidelines. Most
leading Personal Pension Plan providers have reduced their charging
structures within these plans, in order to retain their investors
in these schemes.
Open
Market Option
- It is important to remember that a pension plan holder has the option
when he or she decides to take the benefits from the plan, to move
the fund to another provider, if the new provider can offer a better
Annuity rate:
by
using this option, a planholder could benefit from substantially increased
income. Particularly, there are companies who offer higher annuity
rates for smokers, or people with impaired health. An Independent
Financial Adviser (IFA) should be able to guide you to the best deal.
Pension
Transfers - Currently, charging structures within Personal Pension
Plans from different providers can vary considerably. Also, some providers
have pulled out of this market but kept charges high on existing plans.
In some cases, it may be viable to consider transferring to another
provider, who may use a more competitive charging structure. Poor
investment performance could be another reason for choosing this route.
Independent Financial Advice should be taken, before any decision
is made.
Transfers
out of company Defined Benefit Schemes can be much more complicated,
so it would be best to approach an independent specialist: MJR Financial
Services are not authorised to advise on such matters, but can introduce
you to a specialist advisory service for this purpose.
As
with all long term savings plans, it is most important to start contributing
into a pension scheme as soon as possible, so that the fund has longer
to accumulate and grow. Any delay can have a significant effect on
future retirement prospects. To solely rely on State Pension and State
Benefits should be the last option.
