Retirement & Pensions
Britain has an ageing population and we
all can expect to live longer. However, the number of babies
born each year remains constant whilst there are more and
more pensioners relying on a smaller and smaller workforce
to fund their State pensions. The single persons' current
basic State pension is around £87 per week, and that
figure is set to fall in real value compared to earnings
in coming years. In addition to which, there will be less
and less State pension money available to go round.
Therefore, it is vital that we all make extra provision for
our retirement through some form of savings vehicle. To encourage
people to save for retirement, the Government allows very
generous tax breaks on pension contributions. Basic rate
taxpayers receive tax relief at 22% and higher rate taxpayers
can receive relief at 40%. It's not often that the Inland
Revenue actually gives you money. So it makes sense to take
advantage of a pension, one of the most tax-efficient ways
of investing you will ever find.
A completely new regime came into force with effect from
6 April 2006 (known as A Day) which is designed to simplify
the pension rules for everyone and take away the restrictions
currently in place on the type and number of schemes you
can invest in simultaneously irrespective of whether they
are occupational or individual schemes.
There are limits on the amount of contributions an individual
can make into all pension schemes each year as well as an
overall lifetime maximum fund which will
be eligible for full tax benefits. Above this ceiling a tax
charge will be levied on the excess.
The Statutory Lifetime Allowance (SLA) for the tax years
2007/2008 to 2010/2011 will increase from £1.6 million in 2007/8 to £1.8
million in 2010/11.
In certain circumstances, it will not be obvious if a member’s
benefits exceed the SLA, for example, if they are members
of a final salary scheme and rules are set out how these
benefits can be calculated. If you require details please
contact me.
The maximum annual allowance for the tax years 2007/2008
to 2010/2011 will increase from £225,000 this year to £255,000
in 2010/11. If contributions exceed the annual allowance
then the member will be subject to a 40 per cent tax charge
on the excess.
For final salary schemes, an excess will occur if member’s
benefits increase in value by more than the annual allowance
applicable.
The higher of £3,600 and 100 per cent of earnings can
receive tax relief subject to an overall maximum of the annual
allowance.
There is no maximum contribution. Employers will receive 100 per cent tax relief
on the whole contribution. If the contribution exceeds the annual allowance the
scheme member will be liable to a 40 per cent tax charge on the amount exceeding
the annual allowance.
Anyone will be able to join and pay into any type and any
number of registered pension schemes at the same time.
Investments held before A-Day are not
affected by the new rules.
From A-Day to April 2010 the minimum retirement age will
be 50. From 2010 that minimum age will increase to 55.
Benefits on the grounds of ill-health can be taken earlier.
Benefits must be taken
There are two ways in which individuals can protect their
pension fund if they are or believe they may be affected
by the statutory lifetime allowance. These are known as
Primary and Enhanced and can be used in isolation or both
together where appropriate.
1. Primary
This allows individuals with pension funds
over £1.5m on A-Day to register with the Inland Revenue
by April 2009 and continue to accrue benefits afresh within
limits after A-Day. A Lifetime Allowance Charge (LAC) may
be due if benefits value exceeds personal lifetime allowance.
2. Enhanced
This allows individuals with pension funds
over £1.5m on A day to register with the Inland Revenue
by April 2009 so that the full amount can be protected with
no possibility of a LAC. The Member must however stop accruing
pension benefits before A-Day. Tax penalties will apply if
they start to pay into any pension scheme without informing
the authorities first.
Tax-Free Cash (TFC) will be standardized to 25 per cent of
the benefits value of all schemes, including Additional
Voluntary Contributions (AVCs) which have not previously
been eligible for TFC. There are special arrangements for
members with an entitlement to more than 25 per cent of
the benefits value, or £375,000 TFC on A-Day.
Income Benefit on Retirement
The pension fund can be taken in
one of three ways: -
1 Secured Pension
Scheme pension – defined benefits
(final salary) schemes can only provide a scheme pension.
Money purchase schemes can provide either a Lifetime annuity
or a scheme pension
2 Unsecured Pension
This is similar to the current income drawdown
up to age 75.
There is a maximum amount of 120 per cent of the annual income
payable from a single life, level annuity. There is no minimum
amount, but this will be subject to Department of Work and
Pensions (DWP) requirements.
Income levels must be reviewed every 5 years.
3 Alternatively Secured
Pension
This new alternative has a maximum amount
of 70 per cent of the annual income payable from a single
life, level annuity at age 75. There is no minimum amount,
but this will be subject to DWP requirements.
Income levels must be reviewed every year.
There are a number of different types of private pension
schemes to choose from, and the plan appropriate to you
will depend on your circumstances.
If your employer runs a company pension scheme, it usually
makes sense to join it, especially if your employer makes
contributions to your fund in addition to your own.
If your employer does not offer a company pension scheme,
or if you are self- employed, you should consider a Stakeholder
or Personal Pension plan. If employed, you may be able to
persuade your employer to make contributions too.
If you feel confident enough, you also have the option of
a Self-Invested Personal Pension (SIPP), where you can manage
your own investments.
You can contribute to as many Stakeholder or Personal Pension
plans as you like as long as you do not exceed the new maximum
levels above set by the Inland Revenue.
You should put in as much as you can afford but it is generally
recommended that you contribute at least 10% of your gross
salary and increase your contributions as your earnings increase.
The sooner you get started making realistic pension contributions,
the more comfortable your retirement is likely to be.
In an occupational pension you are allowed to invest up to
15% of your taxable earnings, on top of what your employer
contributes. However contribution rates are often set at,
say 3% or 5%. But should you wish to top up your pension
benefits whilst in an occupational pension scheme you can
now do so by contributing to an Additional Voluntary Contribution
(AVC) scheme run by your employer or a Stakeholder pension
plan.
If you are fortunate enough to be a member of a traditional
occupational final salary scheme, the amount of income you can expect
each year is worked out using a set formula. The company might pay
you, say, 1/60th of your final salary for every year you have worked
there. So, if you have worked for 22 years and your final salary is £33,000,
you will receive 22/60ths of £33,000, which is £12,100
a year.
If you are in an occupational money purchase scheme, your
contributions and those made by your employer on your behalf
are invested in funds, usually linked to the stock market.
The return on your investment depends mainly on the performance
and the type of funds chosen. The same applies with Stakeholder
and Personal Pension plans. As with any long-term investment,
the value of funds can go down as well as up and past performance
is no indication of future performance.
The Pensions world remains complex and baffling for many
of us. Choosing the right pension provider, the most appropriate
funds and agreeing an affordable level of contributions
can be difficult to decide by yourself.
So contact us so that we can analyse your needs and advise
on the most suitable products for your situation.
Bear in mind that there are over 35,000 financial products
in the marketplace and we can assess your financial situation
then suggest the most suitable solutions.
We will: -
- Explain your investment options
- Take you through the different types
of pensions on offer
- Assess your attitude to risk Suggest
the type of fund(s) that will suit you
- Look at your earnings, outgoings and
priorities
- Indicate how much you should be putting
away each month.
All the advice provided will be set
against the background of your complete financial situation.
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