What is a pension?
Retirement Planning is vital if you do not want to face poverty when you reach your sixties. Usually the best option, if it is available, is to join your company’s occupational pension scheme because most employers will top up your contributions,sometimes there are circumstances where it may not be the best advice and you may need some expert advice depending on your situation.
Businesses that run pensions usually offer money-purchase schemes but in some cases, mainly in the public sector, final salary schemes are also available.
NEST & Auto Enrolement
The reforms introduce new employer duties to auto-enrol employees and make contributions to a pension scheme on their behalf. They apply to all employers regardless of size and, in order to facilitate the requirements for those employers who do not have their own pension scheme, a new national pension scheme (the National Employment Savings Trust or NEST) has been set up
The implementation of the new regime will start in October 2012 for the largest employers with over 120,000 employees, continuing for employers of between 50,000 and 119,999 in November 2012 (although there is some flexibility for these employers to automatically enrol earlier, from July 2012, if they wish to do so). Other employers will thereafter be brought into the regime in monthly stages, in order of size (again employers may choose an earlier date subject to certain conditions), so that by October 2013 all employers with over 800 employees will need to comply, with all employers having more than 50 employees being affected by July 2014. By September 2016 every employer in the country will have been staged in. Employers now have a definitive timescale to work towards in terms of considering the implications of the new legislation - in particular, its potential impact on pension and wider total remuneration costs.
In money purchase schemes - sometimes known as defined contribution schemes - the employer usually tops up your contributions by between two and ten per cent of your salary, significantly boosting your pension pot. This means you will be able to buy a larger income, usually in the form of an annuity( although depending on your circumstances this may not be the best option for you and there may be better alternatives) when you retire. Most money purchase schemes allow you to choose from different investment options and the size of your final pension fund will depend on the performance of these investments.
Final salary schemes promise a pension at retirement that is a fixed proportion of an employee’s salary. Most schemes insist that employees must contribute but employers pay the rest. These schemes are great for employees because they provide a guaranteed level of income that is not dependent on the performance of investments. All employee contributions to company pension schemes are tax deductible.
If your company does not offer a pension scheme, you can set up a private stakeholder, or personal pension. Your employer will not usually contribute to your private pension but your pension provider will claim tax relief from HM Revenue and Customs at the basic rate of 20 per cent and add it to your fund. If you are a higher rate taxpayer, you will have to claim the additional 20 per cent rebate - making a total of 40 per cent - through your annual tax return.
The government introduced stakeholder pensions in 2001 to make pensions cheaper and more accessible. They can be taken out directly with a number of providers and the fees are capped at 1.5 per cent a year.
They offer good value but there are only a limited number of investment options available. Most stakeholder pensions invest in tracker funds. Some stakeholder pensions can be set up through your company.
Personal pensions have higher charges than stakeholder pensions but they have a wider number of investment options – usually managed funds. Higher charges do not necessarily mean better performance.
Self-invested personal pensions (SIPP's)
SIPP's allow investors to choose from a wide variety of different asset classes rather a small selection of funds. They also allow investors to put in shareholdings in single companies and to borrow an amount equal to up to 50 per cent of the fund value. SIPP charges are higher than stakeholder and personal pensions and are only suitable for sophisticated investors or those with large pension funds.
SIPP holders can choose to invest in insurance funds, unit trusts, investment trusts, shares and commercial property.
Contribution Levels, bases of and reliefs from taxation are subject to change and their value depends on the individuals circumstances of the investor.
The value of your investment can fall as well as rise and you may get back less than you have invested