Retirement Planning
It's never too early to start saving for retirement. But what are your options? What's involved? How can you boost your income when you retire? The following sections provide a guide to pension basics.
Occupational, Company, Personal, Stakeholder. What do these terms mean? And how do all the types of pension differ? Knowing what's on offer will help you work out what's most appropriate for you. So here's a simple guide to get you started.
Basic State Pension
The Basic State Pension is paid for by National Insurance Contributions (NICs) and the taxes of those in work. The amount you receive will depend on how many 'qualifying years' you build up before state pension age.
A qualifying year is any year with a National Insurance contribution record for each week of that year. Men need 44 qualifying years to get a full Basic State Pension. Women who reach 60 before 2010 need 39 qualifying years, but the State Pension age for women will begin to change from 2010 and by 2020 the number of qualifying years women need will be in line with that for men.
If you haven't got a full contribution record you can still receive a smaller Basic State Pension, based on the number of qualifying years you have. You'll normally need a minimum of 10 or 11 years to qualify. (More information is available at The Pension Service: www.thepensionservice.gov.uk) Note: This link is for general information purposes only. Active accepts no responsibility for information contained or for the site not being available at all times.
From April 2008, the full Basic State Pension for a single person is £90.70 a week, and £145.05 for a pensioner couple.
Many people opt to supplement their state entitlement by saving into another pension. At the moment people receive their Basic State Pension on top of any other pension they have.
State Second Pension (S2P)
S2P is an additional 'top up' state pension paid for by NICs and linked to earnings. You can leave or 'contract-out' of S2P and direct some of your NICs into a Personal or Occupational Pension Scheme instead. If you're thinking of contracting–out, make sure you take some expert advice first.
Occupational or Company Pensions
Occupational or Company pensions are set up by an employer for their employees. If you're offered a company pension plan it usually makes good sense to join it, because your employer may make regular and/or lump sum payments into your retirement fund. And you will usually be able to make payments as well.
Employees who leave before retirement have various options for what happens to their pension fund, depending on their personal circumstances. When they come to retire, they'll normally receive their pension in line with the rules of the company pension plan.
An employer who doesn't run an occupational plan may offer access to a group personal pension instead. This is a collection of personal pension plans grouped together to make administration costs more effective and to maximise investment growth.
Personal Pensions
If your employer doesn't offer a company plan, or if you're self-employed, you could consider paying into a personal pension.
This means paying a regular and/or lump sum to your pension provider, who invests the money on your behalf. You use the fund that has built up to provide your income at retirement.
A Stakeholder is designed to be more straightforward and have lower costs than some other types of company or personal pension.
You can take out a Stakeholder Pension if you:
- are employed (you may be able to have one in addition to a company pension)
- are self-employed
It has the benefit of tax relief on savings of up to £3,600 each tax year and it doesn't matter whether you have a source of income or even pay tax! Individuals who have a source of earned income may be able to invest more than £3600 subject to age and proof of earnings.
In order to comply with Stakeholder rules, there are no initial charges, no exit charges, and no penalties for increasing, decreasing or suspending contributions. The only charge allowable is a maximum of 1.5% per annum of the value of the fund for the first 10 years and 1% thereafter. The minimum contribution is just £20!
A Stakeholder Pension can also be taken out as a tax efficient investment for:
- Children/Grandchildren - with contributions paid by Parent/Grandparents
- Non-working spouses - with contributions paid by the working spouse
- People who have already retired
- Carers
- Expatriates - who may contribute to plans for family members who are still resident in the UK
Inheritance Tax Mitigation
Grandparents who are keen to give money to Grandchildren can now pay into a Stakeholder Pension Plan for them and allow the child to enjoy a generous tax break. Like other forms of investment plan, the pension can be used by Grandparents to avoid Inheritance Tax on the basis that regular contributions may be treated as normal expenditure out of income. If so the grandparent would still be able to use their annual Inheritance Tax exemption in addition to the Stakeholder contribution.
For further information, please contact us at
Email: enquiries@activefinancialservices.co.uk 
Phone: 0845 555 0 888
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