Personal Pensions and Retirement Planning

What is it?

Most people spend their working lives dreaming of their retirement, however, unless they have made proper pension provision, that retirement might unlikely to be as idyllic as they hoped.

There are a whole range of pension options for individuals to choose from and it could be important.

You might be able to choose from stakeholder, company and personal pensions and elect to contract-out of the Second State Pension (2SP) formerly known as SERPS.

What might it cost?

All pension plans attract certain tax advantages; Personal pension contributions are usually paid net of tax and grossed up to your highest marginal rate of tax (e.g. a net contribution of £100 is actually invested as £127 if your are a basic rate tax payer and £166 for a higher rate payer.) In addition the funds grow free of almost all tax and when benefits are taken up to 25% can usually be taken entirely free of tax.

To be able to take advantage of the tax benefits there are specific limitations on how much may be contributed to a pension. Each individual has a Lifetime Allowance which limits the total pension funds they could accumulate over their lifetime and still qualify for tax benefits. For 2006/07 this was £1.5million, rising progressively to £1.8million by 2010/11. Funds in excess of the allowance will have a tax charge levied. The limits on annual contributions have recently been substantially increased. An individual may contribute at least £3600 pa regardless of any earnings and up to a maximum of 100% of earnings (subject to a maximum of £225000 in 2007/08).

There are also rules about how and when you might take your benefits. For instance, the earliest date at which pension benefits could be taken is currently age 50. However, by April 2010 the minimum retirement age for all pension schemes will be 55.

Pension benefits might usually be taken by way of an annuity, i.e. a guaranteed income for life with either a surviving spouse’s pension or a fixed period guarantee on death. ‘Limited period annuities’, where part of the pension fund is used to buy an income for 5 years whilst the balance of the fund remains invested, and ‘value protected annuities', where the balance of your fund is paid to your estate should you die before receiving the value of the pension fund as income, are also available .

You might also consider an Income Drawdown plan where you take up to 25% of your fund as tax free cash and use the remainder to provide for flexible income whilst remaining fully invested. Alternatively, you could opt for a ‘Phased Retirement’ arrangement where you take advantage of segmentation of your pension policy to only take benefits from a part of the plan and leave the balance fully invested.

You no longer have to buy an annuity at age 75, instead you might opt for an ‘alternatively secured pension’ (ASP), but this could severely limit the amount of pension that can be taken.

Is there anything else I might need to know?

Probably yes, the subject of pensions is almost exhaustive. But without wishing to go on and on, it is important to check that your employer does not offer any kind of pension scheme before you make any individual arrangement as the chances are that it could have extra benefits such as an employer contribution.

If you are considering a pension of your own, you may also consider looking into having what is known as ‘waiver of contribution’ (WOC) benefit included as this means your payments are insured in the event of your long-term illness and inability to work. Benefits usually commence after 6 months incapacity and the cost of the cover is relatively small.

The choices appear complex and we would always recommend that you seek expert independent financial advice

Click here to send an immediate request for further guidance.