Pensions
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Planning for Retirement
In a changing world, one thing is now certain - The State will not provide the funds required for you to enjoy a long and trouble-free retirement. The Labour Government, like the Conservative Government before it, aims to help people to help themselves. The cradle to grave welfare state is a thing of the past and retirement after the Millennium will be a private affair, because, for most people, it is likely to be virtually entirely financed from private means.
The Government plans to completely overhaul the State Pension and many aspects of the private pension system. Contribution and tax rules may change and we have already seen some of the proposals in no less than six consultation briefing notes that have been published in the last 12 months.
Choosing the right pension for your particular needs has never been more important.
Pensions combine many benefits: -
A Personal Pension Plan is merely a savings plan for retirement income with 3 main tax advantages:
- Tax relief at your highest marginal rate -in your own particular case, as you are a basic rate taxpayer, you will receive 22% instantly on your contributions. If you become a higher rate taxpayer in the future, you will be able to reclaim the additional 18% tax by direct assessment with the Inland Revenue. However, as your company is contributing
- Investment into pension funds which enjoy significant tax concessions in respect of UK taxation i.e. income tax, capital gains tax.
- It must be pointed out that when you decide to vest your pension (at any age between 50 and 75) the tax-free cash lump sum is limited to 25% of the value of your accumulated pension fund at that time. The balance of the fund must provide a regular income which is then treated as earned income and taxed accordingly.
A Group Personal Pension Plan is merely a collection of individual Personal Pension Plans that benefit from economies of scale due to an employer administering the arrangements as a Scheme and collecting contributions directly from the employees pay before submitting to the product provider. Normally, the employer will contribute on behalf of members and often, additional benefits such as life assurance are included and paid for by the employer.
A Free Standing Additional Voluntary Contribution (FSAVC) Plan is used as an alternative to an employers Company Pension AVC Scheme. Benefits include being able to invest confidentially without your employer knowing the size of your investments, and a wider choice of investment funds. However, FSAVC's are normally more expensive to administer that the Company Pension AVC Scheme and care should be taken before deciding to enter into such an arrangement.
An Executive Pension Plan is an occupational pension scheme normally set up for directors, executives or selected employees. This is a tax efficient arrangement to which directors may invest excess profits, thus reducing the companies Corporation Tax bill and building up funds with which to enjoy a healthy retirement.
A Small Self Administered Scheme (SSAS) is an Executive Pension Plan whose investment capabilities have been widened to allow, for instance, direct share investment, loans back to the company and commercial property purchase.
A Self Invested Personal Pension (SIPP) is a Personal Pension Plan with wider investment options. Usually, the minimum funds under management in a SIPP amount to around £50,000, and investment options include commercial property, Unit Trusts and direct equities amongst others. More and more, SIPP's are not just being used for saving for retirement, but also for providing income during retirement using facilities known as Phased Retirement and Income Drawdown.
Risk Factors
The value of the investments may go down as well as up which means that you could get back less capital than originally invested, should you either surrender your plan early or encash the plan at a time when markets have fallen. Income from the investments may also fluctuate in money terms - this is not relevant if a fixed income is taken, although this may erode the capital. Quoted yields are for illustrative purposes only and are not guaranteed and where past performance figures are quoted, it is no guarantee as to future performance. Changes in exchange rates between currencies may cause the value of your investments and the income from them to increase or diminish.
