Retirement
Do you fancy the idea of living on just your state pension?
That's pretty much the prospect unless you make additional pension arrangements either by
setting up a personal pension or by being part of a company scheme.
Before seeking advice on pension provision it's worth getting the basics straight first.
Occupational schemes
Company pensions are set up by employers, for their staff. They can be “final
salary” or “defined benefit” schemes. These are schemes where a Trust is
set up for the members. Money is paid in from the company, the members or both. The money is
then invested.
Members get benefits in accordance with their contractual terms (typically a proportion of
the final salary for each year that they have worked there). These are expressed as a
pension value, but normally members can opt to reduce their pension by taking some of the
money as a cash lump sum on retirement.
The fund is monitored by Actuaries, whose job is to determine whether or not there will be
sufficient assets to meet the pension payments. If the fund is doing well, the company, and
in theory even the employees, might be able to reduce or stop their payments. If the scheme
does badly (e.g. its investments fall in value) then the COMPANY is expected to make up any
shortfall.
Alternatively, an employer may set up a "defined contribution" or "money purchase" scheme.
In this case the monthly contributions are put into a fund earmarked for that particular
employee who, when he or she retires, is able to take a tax free lump sum and, with the
balance, buy an "annuity."
Annuities are sold by pensions providers and insurance companies and guarantee the
policyholder an income throughout his or her retirement.
Personal pensions
Many employees prefer to set up personal, "portable" pensions of their own. Those who are
self-employed also do so, of course.
In this case, as with defined contribution schemes, contributions are set aside in the pension
plan and used to purchase an annuity before age 75.
One of the great attractions of pension schemes as a method of saving for retirement is that
there is tax relief on contributions up to government set contribution limits. There is
no other investment you can make which will give you 20% or 40% tax relief, depending on the
highest rate of tax you pay.
Which sounds most appealing, paying tax to the government or saving it for your old age?
Stakeholder pensions
With government's introduction of Stakeholder pensions in 2001 there are now plenty of
low-cost pension offerings being put out by the pensions providers to enable most people,
especially those on lower incomes (even those not working), to set aside funds for their
retirement.
And the key to Stakeholder as to any other pension is to start contributing as early as
possible and keep making contributions for as long as possible. That way your pension
pot has time to fill up and for the investment returns on the fund to compound through
reinvestment over many years. The result should be a significant sum of money to invest when
you retire.
No one will suggest that a pension should be the be all and end all of your personal
finance arrangements. But putting one in place is an important long-term investment decision.
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