Pension Schemes: Planning for Retirement
To provide yourself with a financially secure retirement you need to save some of what you earn during the years you work in order to give yourself an income later.
• If you are employed, find out what you will get from your firm’s pension scheme.
• Find out what you will get from the state pension schemes.
• If you are self-employed (or your firm doesn’t have a pension scheme), take out a personal pension.
• If your firm’s pension falls short of what you need, put more money towards your pension. Either add it to your firm’s scheme, or start a separate scheme run by an insurance company.
• You may prefer to invest some of your money in a long-term savings scheme rather than tying it all up in a pension.
What state pensions might you get?
If you would like to know what state pensions you are entitled to, and what they are likely to pay when you retire, you can request a pension forecast. Ask for Form BR19 at your local social security office.
The state basic pension
You get the basic pension if you have paid, or been credited with, National Insurance contributions for at least 90 per cent of your working life (defined as 49 years for men and 44 for women). The state basic pension is around a quarter of average take-home pay.
NOTE: Women who have an incomplete National Insurance contribution record are only entitled to a reduced pension. In this case, married couples will be better off claiming the married couples pension rather than two individual pensions.
If you paid graduated National Insurance contributions at any time between April 1961 and April 1975 (when the scheme was dropped), you are entitled to a graduated pension when you retire—but it won’t be much.
Do you have a company pension?
Company pensions are provided by your employer. You get tax relief on your contributions
• Non-contributory schemes mean that your employer meets the entire cost of your pension.
• Contributory schemes are where you pay towards the cost of your pension with an average tax-free deduction of five per cent.
A good pension scheme should include . . .
• Pensions linked to final pay. A pension calculated on one-sixtieth of your pay near retirement for each year you are in the scheme. This formula gives a pension of two-thirds your pay after 40 years’ service. (Two-thirds final pay is the maximum pension allowed under Inland Revenue rules.) An even better scheme — based on fiftieths of your annual pay — would give a two-thirds pension after only 33 years.
• Provision for paying Additional Voluntary Contributions to the scheme to top up your pension to the maximum two-thirds of final pay.
• A tax-free lump sum on retirement in exchange for a reduced pension.
• Index-linking up to 5 per cent.
• A lump sum payment of at least three times annual pay for those who die before retirement.
• A two-thirds widow’s or dependant’s pension for those who die either before or after retirement. For those who die before retirement, the pension is based on the number of years the member would have worked had he or she survived to retirement.
• Provision for early or late retirement.
• Provision for ill-health retirement.
Less good schemes may…
• Be linked to pay but only offer one-eightieth of your pay near retirement for each year, giving a pension of half final pay for 40 years’ service.
• Operate as ‘money purchase’ schemes. In this case, your pension will depend on how well your firm’s pension fund has been managed, and how much you and your employer have contributed. When you retire, the amount of money which you and your employer has provided for your pension, plus any growth, is invested to give you a regular income. It is difficult to predict your eventual pension.
Should you choose a personal pension?
Personal pensions are long-term savings schemes, either with regular monthly amounts or with a series of lump sum investments. Within limits, any contributions to a personal pension scheme are entitled to tax relief.
Most personal pensions are bought from life insurance companies. The money is left to grow until you retire, when you use the money to buy a pension. As with company pensions, you can take some of the money as a tax-free lump sum.
Who should consider a personal pension?
• The self-employed, and anyone else who doesn’t have a company pension scheme.
• Part-time employees who may not be included in their company pension scheme.
• Employees who intend changing jobs frequently. This is often the case with younger people who are gaining experience or who are trying to find a job they enjoy.
• Women who intend taking a long career break when their children are preschool age.
Personal pensions are not suited to . . .
• Employees in good company pension schemes who don’t plan to change jobs. Companies with their own schemes rarely agree to contribute to an employee’s personal pension, so you would lose the benefit of your employer’s contribution.
• Older employees who intend staying in the same job until retirement.
How to choose a personal pension
• Look for a consistent past performance record across a range of different types of investment.
• Check how much you have to pay the managers for running the fund. The more they take in charges, the less money is invested in your plan.
• Look for ‘with profits’ schemes. These provide a steady rate of growth, and bonuses are added every year which can’t be taken away. A final bonus is added when you retire.
• Unit-linked pension schemes, similar to unit trusts, are a good way of saving but are not suitable for people with less than ten years to retirement. The shorter the time before you retire, the greater the effect a downturn in the stock market at the time of your retirement would have on your eventual pension.
• Deposit administration pension schemes work like a bank or building society deposit account. People in unit-linked schemes often switch into these as they near retirement to avoid the effects of a market downturn.
For advice on state benefits and pensions available:
National Association of Citizens Advice Bureau
115-123 Pentonville Road
London N1 9LZ.
Tel: 071 833 2181.
For Wales call 0844 477 2020
For England call 08444 111 444
For advice on pensions:
The Pensions Advisory Service (TPAS)
11 Belgrave Road
London SW1V 1RB
They are open from 9am to 5pm, Monday to Friday, but closed on public holidays.
0845 601 2923
Helpline for Women:
0845 600 0806
Helpline for Self Employed:
0845 602 7021
For information on reputable brokers:
Office of Fair Trading
Enquiries and Reporting Centre
2-6 Salisbury Square
Telephone: 020 7211 8000
For complaints about pensions:
11 Belgrave Road
London SW1V 1RB
Telephone: 020 7630 2200
Fax: 020 7821 0065
Website: www. pensions-ombudsman.org.uk