Pensions
A great many people who are about to reach retirement can expect to see a good third of their lives still ahead of them. (In fact many of the children being born in our country today can realistically expect to live until they are 100.) Have you thought about which aspects of the life you enjoy now you'd be prepared to give up when you retire? If you don't make provision for yourself, you will certainly have to give up some things.
(Please scroll down the page if you just want to go straight to an overview of some of the main types of pension contracts.)
Perhaps this area ought more properly to be called 'Retirement Planning'. Nowadays, people are generally much more financially aware than in days gone by. When looking forward to their retirement, many people are looking into several more options than just the traditional pension.
For example, some people have got into the buy-to-let market, with a view to using their property(ies) to help towards retirement -either as a capital sum on sale, or as a continuing income stream from rental once their mortgage(s) have been cleared. There are inherent risks with property, rental and tenants, of course, but for some this has been (or is) another option.
Some people have been lucky enough to build up some traditional, non-pension investments while they were still working. If this wasn't earmarked for anything in particular, but control over and access to the whole capital was wanted, then it was probably being invested for capital growth. As they move into retirement, they might want to boost their income, so they can adjust their investments accordingly into income-producing areas. Again, there are, of course, inherent risks involved with investments, such as fluctuating markets, which can affect both the level of the capital itself and the income which it produces.
So why have a Pension?
Whether you have alternative plans or not, pensions still ought to be part of your retirement strategy. They offer by far the most generous tax breaks. Any pension contribution you make (whether a lump sum or part of a regular premium) is instantly increased by 20%, because the government gives you an immediate rebate on every contribution you make (up to a substantial maximum amount). You would be hard-pressed to find ANY other form of savings or investment which grows by 20% the moment you contribute to it.
If you don't pay any tax, you still get the 'rebate', even though you never paid it! If you are a higher-rate taxpayer, you also get to claim another rebate on the difference between the basic rate and your higher rate, when you complete your tax return.
As well as these front-end tax benefits, your pension fund(s) will grow in a largely tax-free environment, which again means that you can reasonably expect that the value will increase at a more rapid rate than funds which sit within a normal tax regime.
Types of Pensions
There are many different types of pensions. You may even already have some, and you may or may not understand what types they are or what they will do for you in the future. We deal with all kinds of pensions, and can advise you accordingly. As we are Independent Financial Advisers we can coral several different pensions, with several different providers, in one place for you, and manage them altogether on your behalf.
Here is a list of some of the more common types of pensions, along with a short explanation for each one:
Personal Pensions
This is the sort of pension you might typically own if you have already done something about pension provision off your own bat. You may have gone direct to a Life Office, or seen a financial adviser. If you are looking for a pension now it may well be one of these which might suit you.
As with most pensions, you are able to make both regular and/or lump sum contributions into your plan. Unlike occupational and state pensions, it is you that determines the age at which you start taking the benefits of the fund you build up. You will set the target age at the outset, but you will actually be able to take pension benefits from your fund at any age between 55 and 75.
When it comes to taking your pension fund benefits, the government rules allow up to 25% of your fund value to be taken as a tax-free lump sum. The remainder must eventually buy you an annuity (a regular income), but there are now several types of contract available which allow you a good deal of flexibility at this point. For example, you may not want or need any income straight away, but do want to take your lump sum, which is something which can be done. You may want to draw down an income directly from the investment itself, not buy an annuity straight away. Again, this (and other) options are possible.
Stakeholder Pensions
A stakeholder pension is simply a personal pension which has certain guarantees (some might say "restraints" set upon it) under government rules. These mainly relate to the size of charges which the Life Office can levy on the pension fund in administration costs. However, this also generally has the effect of reducing the number of funds on offer to choose from, as all but the most basic, non-dynamic funds require some higher level of management (and hence cost) from the provider's perspective. A stakeholder pension will still be suitable for someone who has a modest risk profile, wants very small charges and is happy to join a passive (less actively-managed) fund to achieve their objectives.
(Stakeholder pensions were introduced by the government in an attempt to both simplify the market and try to encourage people to take a greater interest in their own futures. One thing which became law was that employers with more than 5 employees were forced to set up a 'stakeholder facility'. Unfortunately for the government, few decided they would contribute anything into these schemes on their employees' behalf, so the idea fell a bit flat. The government has threatened to make it compulsory for employers to contribute, but have so far held off due to the implications that would have on the job market in general.)
One good thing that the 'stakeholder' world did for the consumer, though, was to force down the cost of pensions generally. Nowadays, many of the pension providers' full personal pension contracts sit below the government's maximum stakeholder charges cap anyway.
Appropriate Pension (APP)
This is a special kind of personal pension which was specifically used for employees who opted out of SERPS (now called the Second State Pension). It can only be used for employees (or those who once were employees), as the self-employed don't make SERPS/Second State Pension contributions. It is a pension where the contributions are solely made up of refunds from the National Insurance Contributions office. These are made as annual rebates from that part of an employee's N.I. contributions which would otherwise have gone towards their individual SERPS/Second State Pension pot.
An APP will show the words 'Protected Rights' against the fund value on statements, etc., indicating that this is in place of SERPS/Second State Pension. The rules for these are slightly different from usual personal pension rules, in that the pension may only invest in a smaller range of ('safe') funds, they must provide some spouse benefit, be at least as good as SERPS/Second State Pension would have been, and they do not allow for a tax-free lump sum to be taken directly from their funds.
Many people actually still have personal pensions which contain both 'protected rights' and 'non-protected rights' elements in the one pension. Their statements should show a breakdown of both these elements, together with their respective values. (Many occupational schemes are also opted out of SERPS/Second State Pension, as they provide adequate benefits in their own right, which are acceptable to the authorities as a substitute.)
It ceased to be especially beneficial to 'opt out' of the state scheme quite some time ago. Several government changes over the years have significantly altered SERPS/Second State Pension and most pension providers have, over a period of time, advised their policy-holders to 'opt back in' to the state scheme.
We come across many people who still have 'SERPS/Second State Pension' pots, and there are things we can look at for these groups.
Self-Invested Personal Pension (SIPP)
As their name suggests, these are still personal pensions, but ones in which a much broader range of investments types may sit. An individual may choose to make his or her own investment choices or appoint someone else (a company) to do this on their behalf. Types of investments might include direct equities (shares), as well as traditional collectives like Unit and Investment Trusts and OEICs, or things like derivatives, traded endowments, or even commercial property.
One of the beauties of owning a SIPP is your ability to borrow up to half the value of your existing fund towards the purchase of commercial property. You could potentially already have sufficient invested in various existing schemes which, when pooled together into a SIPP, could provide a good deposit on a commercial property, which could then be bought by, and sit within, the SIPP as a new investment. Any rental would then be paid into the SIPP (and each one attract tax relief).
If you have your own business, you could potentially borrow money from your own SIPP to purchase your own premises, which you could then lease back from your own pension fund! (And don't forget that all the while these transactions are attracting tax relief at your highest rate.)
Small Self-Administered Scheme (SSAS)
These are occupational schemes, which also allowed a greater choice of investments. Typically used by company directors in the past, they have become less popular since the relaxing of rules around SIPPs.
Executive Pension Scheme (EPP)
These are occupational schemes, which also allowed a greater choice of investments. Typically used by company directors in the past, they have become less popular since the relaxing of rules around SIPPs.
Final Salary
This is an occupational pension scheme, which an employer sets up under trustees, and one where the investment risk is carried by the employer. This is because a final salary scheme allows you to work out exactly what your retirement income will be at any time. You simply multiply your number of years' company service by your leaving salary, and then multiply this again by what is known as the 'scheme accrual rate' (typically a sixtieth or an eightieth). It is therefore the job of the employer to make sure its pension fund has sufficient capital in it to meet its future liabilities. As the company trustees own the scheme, you cannot continue contributing into this kind of scheme if you leave the company's employment (your benefits become 'preserved' until the pre-set retirement age).
Superannuation Schemes, run by local government, health authorities, police forces, etc. are final salary schemes too, but ones where the tax-free lump sum element is always paid in addition to the income element.
It is unlikely that we would recommend you move out of any of one of these types of schemes, even if you have left that company, due to the fact that the employer continues to bear the investment risk for you.
Money Purchase
This is an occupational pension scheme, which an employer sets up under trustees, but one where the investment risk is carried by the employee. This is because the total value of the pension fund at retirement can never be known until the actual retirement date is reached. Many employers who ran final salary schemes in the past have now switched to money purchase schemes, as the burden of carrying a huge pension liability has become extremely difficult to bear.
Although potentially not as good as a final salary scheme, these are still well worth joining, as -by definition- an employer must contribute at least as much into the scheme as they are asking you to contribute (very often they pay more than you).
It is unlikely that we would recommend you move out of one of these schemes whist you are still in that company's employ (so as not to lose their contribution). However, it may be appropriate to move to another scheme if you leave. You will not be able to continue to contribute to this scheme if you leave service and don't transfer the value elsewhere (again, if it is left, it will simply become a preserved benefit).
Group Personal Pension (GPP)
A GPP is simply a personal pension, which has been set up under a 'group' umbrella. All this means is that a company has spoken with a Life Office (sometimes via a financial adviser), and asked them to set up a scheme for its employees on their behalf. As employers, they are likely to be contributing to the scheme, but will at least have set up the facility to have your contributions deducted from your wage/salary before you get paid, and send this on to the provider for you.
Unlike a final salary or money purchase scheme, where you are invited to join as one member of one big scheme, with a GPP you actually own your pension (just as if you had taken it out yourself). This means that if you were to leave that employer, you would still be able to contribute into that pension, as it is yours (it just happened - at least initially- to be set up as part of a group of pensions with all the other company employees).
Many people who have a pension through work actually have a GPP, rather than a true occupational pension. They often don't actually realize this - it's just 'their pension at work'.
All pension schemes fall under either 'personal' or 'occupational' rules, and these differ (principally in their treatment of tax-free cash and selection of retirement ages). You have a statutory right to take the transfer value from any sort of pension, and transfer it into any other (although no other pension is forced to accept transfers in). You also have, when you come to your retirement, something called an 'open market option'. This allows you to turn down the annuity(ies) offered by the company(ies) with whom you saved, in favour of a better annuity on offer from another provider. We have the facility to look into this for you as well.