Retirement planning is vital if you do not want to face poverty when you reach
your sixties. The best option, if it is available, is to join your company’s
occupational pension scheme because most employers will top up your
contributions. Businesses that run pensions usually offer money purchase
schemes but in some cases, mainly in the public sector, final salary schemes
are also available.
The maximum lifetime pension contribution limit is £1.5 million. The maximum
annual limit is £225,000.
Personal accounts
From 2012, employees who are not in an employer's scheme will be enrolled
automatically into their employer's scheme, as part of Government
plans to save people from poverty in retirement. The only employees not
affected will be those younger than 22, older than state pension age or
earning less than £5,000 a year. Employees can opt out of the personal
account if they wish, but if they stay in, their employer will pay a
contribution of at least 3 per cent of full salary. The employee will also
have to contribute 4 per cent of salary, and an additional 1 per cent will
be given through tax relief, making a total of 8 per cent contributions.
Personal accounts will have a default investment fund and a small range of
alternative funds, including ethical
options.
Money purchase
In money purchase schemes, which are sometimes known as defined contribution
schemes, the employer will usually top up your contributions by between two
and ten per cent of your salary, significantly boosting your pension pot.
This means you will be able to buy a larger income, in the form of an
annuity, when you retire.
Most money purchase schemes allow you to choose from different investment
options and the size of your final pension fund will depend on the
performance of these investments.
Final salary
Final salary schemes promise a pension at retirement that is a fixed
proportion of an employee’s salary. Employees must contribute but employers
pay the rest.
These schemes are great for employees because they provide a guaranteed level
of income that is not dependent on the performance of investments. But for
many companies the cost has become too great and a large number have closed
down, leaving thousands of pensioners without any retirement income.
All employee contributions to company pension schemes are tax deductible.
Private pensions
If your company does not offer a pension scheme, you can set up a private
personal or stakeholder pension. Your employer will not usually contribute
to your private pension but your pension provider will claim tax relief from
HM Revenue and Customs at the basic rate of 22 per cent and add it to your
fund. If you are a higher rate taxpayer, you will have to claim the
additional 40 per cent rebate through your annual tax return. The basic rate
level will go down to 20 per cent from April. This will result in less
income for everyone, but basic-rate taxpayers wil suffer more. The amount of
income they receive will fall by 3 per cent, compared with a 1.2 per cent
drop for higher-rate taxpayers.
Stakeholder pensions
The government introduced stakeholder pensions in 2001 to make pensions
cheaper and more accessible. They can be taken out directly with a number of
providers and the fees are capped at 1.5 per cent a year. They offer good
value but there are only a limited number of investment options available.
Most stakeholder pensions invest in tracker funds. Some stakeholder pensions
can be set up through your company.
Personal pensions
Personal pensions have higher charges than stakeholder pensions but they have
a wider number of investment options available – usually managed funds.
Higher charges do not necessarily mean better performance.
Self-invested Personal Pensions
Self-invested Personal Pensions (Sipps) allow investors to choose from a wide
variety of different asset classes rather a small selection of funds. They
also allow investors to put in shareholdings in single companies and to
borrow an amount equal to up to 50 per cent of the fund value. Sipp charges
are higher than stakeholder and personal pensions and are only suitable for
sophisticated investors or those with large pension funds, although.
Sipp holders can choose to invest in insurance funds, unit trusts, investment
trusts, shares and commercial property. Click herefor
more on Sipps
Five pensions news stories
Five pensions features
Five useful websites
Five videos
Retirement planning is vital if you do not want to face poverty when you reach
your sixties. The best option, if it is available, is to join your company’s
occupational pension scheme because most employers will top up your
contributions. Businesses that run pensions usually offer money purchase
schemes but in some cases, mainly in the public sector, final salary schemes
are also available.
The maximum lifetime pension contribution limit is £1.5 million. The maximum
annual limit is £225,000.
Personal accounts
From 2012, employees who are not in an employer's scheme will be enrolled
automatically into their employer's scheme, as part of Government
plans to save people from poverty in retirement. The only employees not
affected will be those younger than 22, older than state pension age or
earning less than £5,000 a year. Employees can opt out of the personal
account if they wish, but if they stay in, their employer will pay a
contribution of at least 3 per cent of full salary. The employee will also
have to contribute 4 per cent of salary, and an additional 1 per cent will
be given through tax relief, making a total of 8 per cent contributions.
Personal accounts will have a default investment fund and a small range of
alternative funds, including ethical
options.
Money purchase
In money purchase schemes, which are sometimes known as defined contribution
schemes, the employer will usually top up your contributions by between two
and ten per cent of your salary, significantly boosting your pension pot.
This means you will be able to buy a larger income, in the form of an annuity,
when you retire.
Most money purchase schemes allow you to choose from different investment
options and the size of your final pension fund will depend on the
performance of these investments.
Final salary
Final salary schemes promise a pension at retirement that is a fixed
proportion of an employee’s salary. Employees must contribute but employers
pay the rest.
These schemes are great for employees because they provide a guaranteed level
of income that is not dependent on the performance of investments. But for
many companies the cost has become too great and a large number have closed
down, leaving thousands of pensioners without any retirement income. Click here
for more on the scandal.
All employee contributions to company pension schemes are tax deductible.
Private pensions
If your company does not offer a pension scheme, you can set up a private
personal or stakeholder pension. Your employer will not usually contribute
to your private pension but your pension provider will claim tax relief from
HM Revenue and Customs at the basic rate of 22 per cent and add it to your
fund. If you are a higher rate taxpayer, you will have to claim the
additional 40 per cent rebate through your annual tax return. The basic rate
level will go down to 20 per cent from April. This will result in less
income for everyone, but basic-rate taxpayers wil suffer more. The amount of
income they receive will fall by 3 per cent, compared with a 1.2 per cent
drop for higher-rate taxpayers.
Stakeholder pensions
The government introduced stakeholder pensions in 2001 to make pensions
cheaper and more accessible. They can be taken out directly with a number of
providers and the fees are capped at 1.5 per cent a year. They offer good
value but there are only a limited number of investment options available.
Most stakeholder pensions invest in tracker funds. Some stakeholder pensions
can be set up through your company.
Personal pensions
Personal pensions have higher charges than stakeholder pensions but they have
a wider number of investment options available – usually managed
funds. Higher charges do not necessarily mean better performance.
Self-invested Personal Pensions
Self-invested Personal Pensions (Sipps) allow investors to choose from a wide
variety of different asset classes rather a small selection of funds. They
also allow investors to put in shareholdings in single companies and to
borrow an amount equal to up to 50 per cent of the fund value. Sipp charges
are higher than stakeholder and personal pensions and are only suitable for
sophisticated investors or those with large pension funds, although.
Sipp holders can choose to invest in insurance funds, unit trusts, investment
trusts, shares and commercial property. Click herefor
more on Sipps
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Five useful websites
Department for Work and
Pensions
The Pensions Advisory
Service
Pensions
made clear by the Financial Services Authority
Pension
calculator
Pension action group
