PensionsGuide to

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Contents

Introduction 3Pensions

What is a pension? 4Pension Basics 5

Why Bother With a Pension? 6Retirement

Retirement Options 11Basic State Pension 12

Additional State Pension 15Types of Pension

Stakeholder Pension 18Personal Pensions 22

Additional State Pension 23Unit Linked Pensions 24With Profit Pensions 26

Group Pension 27Self Invested Personal Pension 28

Company Pensions 30Pension Release 32

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Introduction

How do you know what’s right for you?

A stakeholder pension, a SIPP, an Over 50s plan?

How much should you be contributing into your Pension Scheme?

How much of an Annuity income could you stand to receive from your Pension Pot?

PensionCalculator.org is dedicated to providing a simple, uninfluenced, truthful, balanced take on all subjects Pension and Retirement related.The information within this guide is for general guidance and is not to be taken as ‘financial advice’.

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What is a pension?Despite constituting the largest long term savings commitment a person will make apart from buying a house, pensions are frequently misunderstood. A pension is a method by which a person can save money so that they can be sure to have an income when they retire. The structure by which these payments are made is referred to as a ‘pension plan’ and the fund accumulated under such a plan is tax-free. The income payments made once the plan is completed are usually of regular and equal amounts and continue until the policyholder passes away. While pensions are normally used as retirement plans they may be received on the basis of disability or other circumstances. It is advisable to contact an Independent Financial Adviser (IFA) for help with setting up the right type of pension for you. The simplest form of pension is a Stakeholder Pension. These are available from stakeholder pension providers such as banks, building societies and life insurance companies who will invest your savings on your behalf. This is a great way to offer you flexibility and control over your savings, adding as much in as you wish each month as well as benefiting from the Governments adding investment. In addition to this, you will receive tax relief on the amount you put in. It works the same way by paying in every month or by a lump sum

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Pension basics

Age of retirementUpon reaching the age of retirement, the government automatically provides a State Pension to those who have built up enough National Insurance contributions to achieve the threshold of qualifying years. However, additional pensions can also be arranged by way of personal savings plans or, more commonplace, through employers who will normally require regular contributions from an employee’s income to build the saving. Consequently, pension plans are seen as a way for an employee to transfer part of their present income stream toward their retirement income.

Level of incomeThe level of income on retirement will largely depend on how much is saved, how these savings are invested, at what age a person wishes to start receiving income and the annuity purchased with the accumulated lump sum, that is, the income an insurance company will give the person for the rest of their life. There is a large amount of choice regarding the types of pensions available and as such finding the one that is best suited to your circumstances and needs can be tricky. It is important that you conduct thorough research and it could be advantageous to consult an IFA (Independent Financial Advisor).

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Why bother with a pension?There are a number of reasons why setting up a pension can be worthwhile if you want to secure a healthy future for you and your family. You will still need food and shelter as an absolute minimum but you will probably also want a good lifestyle. One of the best ways to ensure a healthy lifestyle after retirement is to start saving when you are young!

Save moneyBy beginning to save money from an early age, even if it is just small amounts, you can eventually end up with a substantial amount to live on once you reach retirement. If you fail to save early on you may find yourself having to continue working past retirement age just so that you have some form of funds to live on. The key is to be sensible with the amount you save each month and effectively monitor your budget of income to improve your overall lifestyle after retirement.

You can start saving at any age and there are even children’s pension plans on offer where you can start saving on behalf of your child so that they will have some money put aside for their future plans and even for when they reach retirement.

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Why bother with a pension?Pension FundsPension funds that are set up from an early age will have the huge advantage of benefiting from stock market growth. By paying as little as £20 you could have as much as £120,000 by the time you reach 60. The good thing about saving when you are younger is that you may not have as much responsibility than if say you were in your thirties and had a mortgage to pay for and children to look after. So at a younger age you are more likely to have that bit of extra money to put into your pension pot. You can use our pension calculator to give you an idea of how much saving over the long-term might give you in retirement.

FlexibilityFlexibility is another great advantage to pensions; here are just a few examples of setting up a pension fund. Firstly, there are a number of different ways you can pay into it. You can decide to pay in one lump sum or by making regular contributions; there are also no restrictions if you decide to stop making regular payments into the fund for any reason. This plan is also free from income tax, which helps it to grow the funds much faster and you can set up your contributions to suit your inheritance tax planning. These are just a few examples of the benefits of setting up a pension fund.

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Why bother with a pension?AdvantagesThe main advantages, therefore, are that you can decide how much you pay and how you pay it. You do not have to pay tax and you are guaranteed a salary after you retire. In some circumstances, however, particularly with women who may be more likely than men to take a career break, pensions can pose some disadvantages. So it may be better to look at alternatives such as ISAs (Individual Savings Accounts) or even investment into a second property.

Tax-freePensions represent an effective tax free savings opportunity as there is no other place that the government contributes cash to your own individual savings pot. It is very tax efficient with the possibility of an additional contribution from your employer, making it an ideal way of saving if you want to see a lot of extra cash at the end of it.

Whether or not you are fond of the idea of a pension, there will eventually come a time when you can no longer work, so a little extra cash saved is a great way to guarantee that future income today.

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Why do you need a pension?Thinking about retirement is often low on the list of life’s priorities.

Numerous financial commitments frequently trump a consideration of future needs; sourcing income for the mortgage, household bills, children and other everyday essentials means that it is no surprise that saving for the future often gets overlooked.

Financial needsHowever, a person will still have financial needs beyond the age of their retirement – even the cost of a daily newspaper or a weekly grocery shop can add up over a year. Often post-retirement plans include travelling, enjoying new hobbies or simply taking the opportunity to take in life’s luxuries. Retirement also gives us a lot more free time, which we will often fill with activities that may cost money.

Serious ChoicesWhatever the goals are, serious choices will have to be made and the sooner such choices are made the faster the freedoms that retirement affords can be enjoyed. Forward planning offers peace of mind that you have planned well for your future and will be financially stable when you get there.

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Why do you need a pension?Short delayA pension plan will assist in providing this certainty and, given that even a short delay can affect the amount received upon retirement, the general rule is that the earlier contributions are made, the better. By thinking about pension plans now, much of the anxiety surrounding the affordability of future plans can be reduced. If a person is thinking of retiring they will need to take into account where their future income will be coming from and how much it will be. Our pension calculator can give you an idea of how much you would need to save for a comfortable retirement income. Financial choice A crucial financial choice to be tackled is how the pension fund is to be converted into income. Although this decision need not be made until retirement is approaching, it is important to consider carefully what the right option is for a person’s specific circumstances. A pension fund can provide a tax-free lump sum payment upon retirement (normally up to the value of 25% of the fund’s value) while the amount of any regular payments will depend on the size of the fund that has been built up and the annuity rates on offer at the time of retirement. An Independent Financial Adviser can help guide you on what options are best for your circumstances.

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RetirementoptionsFactors such as health, age and additional sources of income may also have an impact on retirement options. Attitudes towards investment risk, the balance between lump sum payouts and regular income and what will happen to your fund when you die are all considerations that will shape the choices you make when choosing your pension plan.

It should always be kept in mind that any returns are not guaranteed – the value of a pension fund may fall as well as rise leaving a person with less money upon retirement than initially invested.

Consultation with an IFA is recommended in many situations as the professional will be able to assess your personal situation and goals and advise you accordingly.

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Basic state pensionThis is available to anyone who has enough years from their National

Insurance contributions to be entitled to a basic state pension. You have to claim your pension and you can also choose, if you wish, to defer it to a later date. By doing this you could also receive a lump sum as well as your state pension when you claim. To find out how much you can save through setting up a pension when taking into account factors such as your age, sex and earnings, you can use our calculator here: http://www.pensioncalculator.org.

State Pensions provide just over half of all the income provided by government. You can claim when you reach State Pension age (which differs according to your year of birth) and the maximum amount available to one person is £107.45 per week.

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Basic state pension• As of 6th April 2010 the number of years required to qualify for a full Basic State Pension reduced from 39 years for women and 44 years for men to 30 years of everyone, regardless of sex.

• From 2012 the annual cost of living increases in basic State Pensions will increase in line with earnings, rather than prices as before (this is subject to affordability but will start by 2015 at the latest).

• As of 6th April 2010 Home Responsibilities Protection (HRP) has been replaced by a new system of weekly credits, which benefits parents who receive child benefit for a child under the age of 12 and carers caring for somebody who is sick or disabled for more than 20 hours a week.

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State pension ageThe current state pension age for men is 65, and the state pension age for women is in the process of being increased from 60 to 65 in 2020. The age at which you can claim state pension differs according to year of birth. You can work out the age at which you qualify for the state pension by using our state pension age calculator.

To reflect increasing life expectancy the state pension age will again rise gradually from 65 to 68 between 6th April 2020 and 5th April 2046.

What is my State Pension Entitlement?

The current weekly rates (2012/13) are as follows:

Single person (male or female) – £107.45

Married man/woman or civil partner – £107.45

Married man/woman or civil partner, using partner’s National Insurance record – £64.40

These rates are provided to those who have fulfilled their National Insurance (NI) contributions. Married couples may, therefore, receive up to £214.90 per week. Alternately, there is a ‘couple’s pension’, for those couples in which one partner has not fulfilled their NI requirements. This is worth £171.85.

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Additional state pensionThe additional State Pension is a top-up of the standard State Pension, also known as SERPs and more recently S2P.

Introduced in 1978 the additional State Pension was designed to give us extra income in our retirement years. Originally it was based on National Insurance contributions, meaning the more you earned, the higher your additional pension would be.

It was introduced as SERPS, which stood for the State Earnings Related Pension Scheme. It was compulsory for everyone making National Insurance contributions. It was an earnings related pension, but did not benefit those unable to work.

Whilst currently, the more you earn, the more you receive, up to a limit, the government wants to make the additional State Pension a flat rate payment by 2030

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Additional state pensionLow to medium earners The new system helps low and medium earners by allowing them to accrue the maximum amount for someone falling within their contributions band.

So in 2008 the first contributions band applies to all those earning between £4,680 and £13,500. However, everyone is treated as having earned £13,500. The second band applies to people earning between £13,500 and £31,000 and they will also benefit more from the new S2P scheme than the previous SERPS.

Not in paid employment

If you don’t make National Insurance contributions, either through not working or earning less than the minimum tax band you may still benefit from the S2P scheme. If you are looking after a child under the age of 6, or someone with a long term illness or disability, you may qualify to build up an additional State Pension anyway. If you qualify you will build up just over £1 a week for each full tax year you are caring for someone. You can also make voluntary National Insurance contributions.

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Additional state pensionContracting outThere was until April 2012 the option to contract out of your additional State Pension. This meant that you would not build up any additional State Pension whilst you are contracting out, but that you and your employer would either pay preferential National Insurance contributions or in the case of personal and Stakeholder pensions the government will pay a contribution into your pension fund.

From April 2012 the option to contract out was abolished, simplifying the process and making it easier to understand. Those already contracting out are able to continue to do so. Someone will contract out of the additional State Pension if they have a personal, company or Stakeholder pension and feel that the increased contributions made to this pension as a result of either paying lower National Insurance contributions, or receiving direct government contributions to their own pension pot, will benefit them more than the additional State Pension in retirement. Because of the nature of annuities and the volatility of the annuity rate market this is not a decision to be taken lightly and professional help should be sought.

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Stakeholder pensionA Stakeholder Pension is a new flexible and low cost savings scheme. The scheme comes in the form of a money purchase pension that can be used to improve a person’s income in the later stages of life.

Stakeholder Pensions can be either occupational (a company pension) or personal schemes. This means that while some employers offer them, it is also possible for an individual to start one independently. These pensions have to meet strict minimum Government standards. These include:

• Limited charges – the charges levied by stakeholder pension providers or managers of such schemes in order to cover their costs and provide a profit are limited to being no more than 1% of the value of the pension fund for each year. However, any plans set up on or after 6 April 2005 will attract an increased annual management charge of 1.5% for the first ten years and 1% thereafter. Any additional services, such as personal financial advice can attract an additional charge on the proviso that they are agreed with the policyholder in advance and are not compulsory for joining the scheme;

• Low minimum contributions – the minimum sum for contribution that the provider or manager can require cannot exceed £20;

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Stakeholder pension• Flexible contributions – policyholders are permitted to contribute regularly or occasionally to suit their particular situation. It is generally better to develop a regular saving habit; however a temporary break will not attract any penalty. A minimum of one month’s notice must be provided for stopping contributions if they are paid through an employer (who is permitted to allow changes no less than every 6 months);

• Penalty-free transfers – should a policyholder wish to transfer any sums saved to a new scheme, they can do so without any charge being made by the existing scheme. No charge can be made by the new scheme for accepting the transfer if it is also a stakeholder scheme and a person may find that it is of benefit to join the new employer’s scheme. If they wish to continue to contribute to the existing stakeholder scheme, the relevant conditions will need to be checked.

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Stakeholder pensionMoney purchase pensions are those that are built up through plan holder contributions, investment returns and tax relief and are best thought of as consisting of two stages:

Stage 1

The fund held with your pension provider is invested in a variety of investments including stocks and shares with a view to maximising the growth of the fund in the years prior to retirement. Plan holders will normally have a range of funds in which to invest but should be aware that the value of any investments may rise or fall.

Stage 2

Upon retirement a plan holder can withdraw a tax-free lump sum from the pension fund, using the remainder to secure a regular income for the remainder of their life, usually by purchasing a lifetime annuity.

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Stakeholder pensionA number of factors will determine the amount of pension income received including:

• How much is paid into the fund

• How much, if anything, the employer pays in

• How well the investments have performed

• What charges have been taken out of the fund by the pension provider

• How much is withdrawn as a tax-free lump sum

Annuity rates at the time of retirement

• The type of annuity chosen

A Stakeholder Pension is a good starting place for someone wanting to make pension provisions but who cannot guarantee a large amount of money to set aside per month. As your situation changes, you can easily transfer your Stakeholder into a personal pension, which for a larger monthly contribution, allows you with a greater scope of choice.

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Personal pension

Firstly, what constitutes a Personal Pension Plan (PPP)? The primary aim here is simply to transform your hard earned money into a steady influx of financial support throughout your retirement for the future.

• 25% is an important percentage. When the time comes for you to extract your benefits and prepare for retirement, you can usually take 25% of it as a tax-free cash sum (Pension Commencement Lump Sum – PCLS). Furthermore your personal contribution to your fund will receive basic rate tax relief, simply meaning that an injection of £80 of your own money will result in a generous £20 from the taxman, this is a 25% increase.

• Afterwards, the money left over can be used to purchase an annuity. An annuity is basically a fixed sum of money paid to you every year, for the rest of your life. A lifelong source of income that you buy from any life insurance company. You don’t have to buy an annuity from your pension provider, so take advantage and shop around for the best deal by comparing annuity providers. It’s important to remember that the final figure for this income will be determined by investment returns and current annuity rates at the time of your retirement.

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Annuities

To help you on your way, here is a list of the five common annuity categories available:

1. Level – You receive an identical income each year

2. Increasing – Your yearly income is increased through a fixed rate, or at the rate of inflation

3. Investment-linked – The amount received from your annuity provider is determined through investment returns. These are built upon the performance of a fund managed by the annuity provider

4. Joint-life – Your partner receives an income if you die before them

5. Enhanced – Illnesses that affect life expectancy are considered and a higher rate is received accordingly

The other available choices involve avoiding an annuity, if so desired. If this is the case, you have the option of withdrawing directly from within your pension fund, but of course this will be tax-deductable. This can either be done as an ‘unsecured pension’ before the age of 75, or as an ‘alternatively secured pension’ from the age of 75. These two are very similar, but the difference lies in the amount that can be drawn, the ‘alternatively secured pension’ has lower limits.

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Unit linked pensionA unit linked pension is a type of pension plan where contributions are used to buy ‘units’ in a pooled fund or funds.

There are a variety of investment funds available with this type of pension, and such funds are categorised together in sectors to represent the style, area and risk level in which the providers of the pension fund or where proactive, the savers, have decided to invest. The value of the individual units can fall as well as rise over the period of investment. Therefore, care is taken to spread the risk by various means in order to provide the best return whilst ensuring that funds are still wisely invested.

Lifetime of the Investment

At any time during the lifetime of the investment, the majority of unit linked pension plan providers will permit the switching of funds for risk management purposes. This is important as it is common practice to switch to less risky funds as the chosen date for retirement approaches; at this point riskier funds are viewed as less attractive than those that are more cautious. Prudent investment decisions often mean that towards the end of the investment period, the fund is usually moved to a fixed investment where the returns are lower but generally guaranteed.

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The four main types of unit linked investments funds are:

• Managed funds – these popular unit linked funds invest in a mixture of UK and overseas shares, property, fixed interest securities and cash deposits. Here, an investment manager’s role is to monitor and adjust the balance between the various assets to ensure an appropriate exposure to risk as investment conditions change.

• Specialist funds - These are funds that cater for savers who wish to make their own investment decisions by investing in specialist funds that are focussed purely on one type of asset.

• Tracker funds - These are funds that can be characterised as “passive” as they aim to follow or ‘track’ the performance of a specific stock market index such as the FTSE 100 or the FTSE All Share Index. As expected the funds will fall and rise in tandem with the share prices of the indices that the funds track.

• Lifestyle funds - A hybrid form of funds in the sense that they are usually subject to an arrangement whereby savings are first placed in a tracker fund before being gradually shifted into a safer fixed interest fund over a period between 5 to 10 years.

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With profitspensionA ‘with profits’ pension plan is an insurance based pension scheme that operates by paying bonuses into the pension fund during successful investment years in order to compensate for the performance of the fund during those years that have a poorer investment experience. The pension is designed for those that do not have or do not wish to participate in a company pension scheme with their employer or alternatively, for those who are self-employed or wish to save over and above the contributions they already make to a scheme with their employers.

Important considerations when considering ‘With Profits Pension Plans’

A with profits pension plan is one of many options available for those looking for a way of financially safeguarding their future. For those with no access to a pension scheme at work they remain a viable alternative. As a means of ‘topping up’ existing occupational pension plans, a with profits pension can serve as a useful addition to your overall fund. In many cases these should be considered in addition to other available pension product options.

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Group personal pensionA group personal pension plan (GPP) is very simply a collection of personal pension plans (PPPs) provided by an employer for its employees.

A GPP is distinguishable from a personal pension plan (PPP) as the charges levied by the provider under a GPP may be lower than under the equivalent PPP. It is common for a pension provider to offer a reduction in its normal charges as they are dealing with bulk business, hence arranging a GPP can be advantageous to a person who requires charges to be kept to a minimum.

No Guarantees

There are no guarantees of returns on these investments and their value may rise as well as fall. Returns, as with all investments, are determined by the level of risk and fluctuation that an investor is willing to take in order to pursue the possibility of making a gain. Accordingly, it is common practice for policyholders to adjust the asset allocation in their investment portfolios so as to lower the risk levels as they approach retirement. For instance, as retirement nears, stocks and shares can be converted into either cash or fixed interests such as government bonds.

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Self-invested personal pensionA Self Invested Personal Pension or ‘SIPP pension’ is a personal pension with added flexibility that allows a policyholder to directly select and manage their own investments.

As with other forms of pension plans, SIPP pensions are subject to the usual pension rules that relate to contributions and eligibility. The number of different investment options is far greater than those of traditional personal pensions and the emphasis with this type of pension is placed on putting savers in full control of their money and consequently, their future life plans.

Contributions can be invested in a variety of assets including:

• individual shares

• stock-market and property funds

• futures and options

• REITS

• unquoted shares

• gilts (government bonds) and company bonds

• cash

• commercial property

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Self-invested personal pensionIncreased flexibility

The increased flexibility and greater freedom of investment afford by SIPPS requires active investment management on the part of the policyholder, in addition to an increased need for receiving investment advice due to the higher risks involved in many of the available investments. The value of investments made with contributions under a SIPP, as with all investments, can decrease as well as increase and could result in a policyholder receiving less upon retirement than they had initially invested.

Added choice

An added element of choice and flexibility afforded by a SIPP is that when a policyholder seeks to make a withdrawal from the fund they need not wait until retirement to take income from a SIPP, a benefit that is not available with a traditional pension plan. The ability to make such withdrawals is subject to the policyholder having enough money in the fund and participating in regular reviews to ensure that the fund can sustain the level of income being withdrawn. Depending on the terms of the plan’s provider, there may be charges to accessing the SIPP in this way.

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Company pension

A company pension is often known as an occupational pension. Employer private pension schemes are provided by your employer for you to join. Occupational pensions are usually set up and administered by a company or through a third party on the company’s behalf for their employees.

How does a company pension work?

It may either be contributory with employees making pre-taxed payments direct from their salaries or non-contributory where the company makes the payments on their employees’ behalf. In contributory schemes, companies will commonly match the employees’ contribution towards their pension fund, which means the employees will double the amount of money being put into their pensions through such a pension arrangement.

There are no other pension plans that can compete with the benefits of a company pension scheme. This explains the reason why IFAs recommend workers to join company schemes as soon as they can. Important changes have been introduced as of 2012; read more about them here.

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A company pension is often known as an occupational pension. Employer private pension schemes are provided by your employer for you to join. Occupational pensions are usually set up and administered by a company or through a third party on the company’s behalf for their employees.

Salary-related pension

A salary-related pension is seen as the best type of pension one can ever get. They guarantee to pay a retirement income based on a percentage of your salary every year for the rest of your life.

Money purchase pension

If you have a money purchase scheme, the amount of money you will get is based on how much has been paid into your pension fund and how well the pension money pot has been invested.

When I can receive the full benefits of my company pension?

It depends on your employer to set out the rules in your company pension scheme, which details out the retirement age with your company.

Employer contributions

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Pension release

When a pension owner takes money from their pension before the normal age of retirement, this is called pension release.

Who can apply for pension release?

To be first considered for pension release, you need to be over the age of 55 and already be a member of either a private or company pension scheme. You also need to have a sufficient amount of money already saved; at least £15,000 is recommended.

Pension release could be a suitable alternative for somebody who is having problems financially. Taking out a regular loan from a bank or finance company could lead to high interest rates and may not be the best way to gain extra funds if you are due to retire soon. It might also be a choice for you if you are still enrolled in an old pension scheme which has suffered low returns because of the stock market.

It is advisable to seek the assistance of an Independent Financial Adviser before considering pension release as an option.

You can see our Pension Release Comparison Table by Clicking Here

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About PensionCalculator.orgPensionCalculator.org is a free independent Pension & Annuity Information resource. Our goal is to help individuals and families of every age and walk in life, to better understand and prepare for their later years and retirement.

PensionCalculator.org was established with the vision of providing the most thorough and complete independent overview of the options and services available within the Pension and Retirement sector.

When it comes to matters of Finance, very often your own personal circumstances will differ from others around you, so we at PensionCalculator.org will always urge our users to seek advice from qualified regulated professionals.