Pension Planning

Due to the complexities of the pension market it can be difficult to understand (or even have the time to find out about) changes and forces within the industry, which shape all of our futures. However, those who are hoping to rely on the state may be in for a rude awakening. Simply put, the basic state retirement pension will not be sufficient to provide a comfortable retirement, for anyone.

Unfortunately, the situation is set to deteriorate even further. The proportion of retired people is ever augmenting (increasing), but at the same time, the proportion of working taxpayers is curtailing (reducing), which of course means that the vale of state pensions will curtail (reduce) even further. It is therefore essential that individuals make provisions for their retirement and new legislation in the last few years has greatly increased the options and choices available, both before and after retirement:

A pension is a long term investment. The fund value may fluctuate and can go down.

Personal Pensions

The most tax-efficient way of saving is through a Pension. The self-employed pay contributions gross which can then be claimed as an allowance against taxable business profits and employed people make contributions net of tax relief. This means that you will only actually contribute £78 net for every £100 of contributions, assuming basic rate tax at 22%. Higher rate taxpayers can also claim additional relief, so they will only contribute £60 for every £100 of contributions falling in the higher rate band, assuming a higher rate tax of 40%.

Your pension contributions will grow in funds not liable to tax on capital gains and where all forms of investment income (except dividends) are also tax-free. Your money will therefore grow faster in a Personal Pension Plan than in most other forms of investment.

At retirement, you have the option to take up 25% of the fund as a tax-free cash lump sum, with the balance being used to buy a pension.

Executive Personal Pensions

An executive scheme is an arrangement set up under trust by an employer for the benefit of employees and is usually for company directors or management. The scheme will usually include life assurance (death in service) and can also cover, spouse death in service pension and provisions for dependent children.

Pension Annuities

Once you have reached retirement, you can choose either to accept the annuity quoted by your personal pension plan provider, or you can see if there is a better rate on the open market (the market open option). Hence, you are allowed to transfer the funds you have built up with your existing provider to another Life Company, if it is advantageous to do so. Unit linked annuities offer a useful alternative to the traditional annuity contract. Here, you use the funds that you have accumulated to purchase a certain number of units in one of the companies unit linked investment funds. The value of payments will then depend on the value of these units. Annuity payments will therefore fluctuate with investment returns as income payments are calculated in each period according to fund performance. In effect you are giving up the guarantee as to the level of future payments in the hope that good investment returns will enable your payments to be greater in the longer term, than might otherwise have been the case.

With-profit annuities link the value of annuity payments to the performance of a companies with-profit fund. The level of income is therefore determined by what happens to the with-profit bonus rates declared by the company. The 'smoothing' effect of bonuses tends to provide a more stable income stream, than straight unit linking.

Investment linked annuities are more suitable for younger pensioners where the investment period will be longer. It is advisable to have additional capital available to top up income, should payments be reduced, or fail to rise, due to poor investment conditions.

Pension fund Withdrawal

Those shortly due to retire from full time work need their pension fund to provide a replacement income in retirement and there are several reasons to defer the purchase of an ordinary annuity. Interest rates may be low and may increase and provide better value in the future. It may not be appropriate to commit to a fixed pattern of pension income for life, provision of a widows pension will provide protection for a family but will greatly reduce the level of annuity income available. Pension Fund Withdrawal/Phased Retirement will enable this decision to be deferred and also allows for the fund to provide lump sum death benefits to the widow. This option allows a much lower income to be taken, which gives the potential for a greater pension later, via fund growth and possible higher annuity rates. A major advantage with this option is the ability to vary this level of withdrawal. The greater the withdrawals, the higher the risk that the fund will diminish.

Stakeholder

Stakeholder pensions have been available since April 2001, to support individual pension provision and are particularly designed to help those on middle incomes and may also benefit those on higher incomes. They provide low cost, flexible and secure pension arrangements.

The information on this site is for general guidance only. Foyle Financial is an appointed representative of the M & E Network Limited, which is authorised and regulated by the Financial Services Authority. The M&E Network is entered on the FSA register (www.fsa.gov.uk/register/) under reference 150643.