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.

New Pension Regime Rules
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.

Statutory Lifetime Allowance
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.

Annual Allowance
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.

Member Contributions
The higher of £3,600 and 100 per cent of earnings can receive tax relief subject to an overall maximum of the annual allowance.

Employer Contributions
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.

Concurrency
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.

Pension Ages
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 

Protection
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.

Retirement Benefits
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.

Pension Types
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.

Contribution Levels
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.

Retirement Income
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.

Importance of advice
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: -