Pension Advice
Pension Advice – Can You Survive Without It?
If you are uncertain about your financial arrangements on
retirement, you should consider seeking
pension advice. Don’t
worry if you think you’re too young! In fact, the sooner you
start considering your pension arrangements and looking for
pension advice, the better.
Before deciding what your pension arrangements should be, you
need to be clear about what type of pension you are looking at.
There are three basic types of pension: state, occupational and
personal.
1. State pension provision is the most basic. It’s a safety net
to prevent you from actually starving, rather than a means of
providing you with a comfortable old age. In fact, the basic
state pension on its own would be very difficult to live on.
Most people also qualify for the State Second Pension (SP2) or
Additional State Pension. If you are earning more than £4,680
you can contract out of this, to join another
pension scheme.
2. Occupational pensions – some employers make membership
compulsory, while others are optional. Up until recently, most
occupational pensions were “defined benefit” final salary
schemes, which were very desirable, but expensive for the
employer. Nowadays, more and more of these are being closed
completely, or closed to new entrants. Other occupational
pensions are known as “defined contribution” or “money purchase”
schemes where the amount available depends on the size of the
fund. You then use your fund to buy an annuity. If you contract
out of the SP2 scheme to join an occupational pension, you and
your employer will pay reduced National Insurance contributions,
your employer contributes to the scheme and also makes
deductions from your salary.
3. Those who don’t qualify for an occupational pension, or
choose not to join one, should build up a
personal pension plan.
You can get tax relief on your contributions to your pension
plan, up to a maximum of £225,000 in a tax year and a total
limit of £1.6 million. There are a large number of pensions
plans on the market and you really need to take
pension advice
to help you decide which is the right plan for your individual
circumstances.
In addition to these, everyone, whatever their circumstances,
can take out a stakeholder pension, which is like a lower-cost
personal pension. These operate on a
"defined contribution"
basis, and you buy an annuity with the fund you have built up.
Whatever your pension situation, there are some important things
you need to be aware of:
- Do NOT rely on the state pension to provide you with a decent standard of living in old age. Even the Additional State Pension will just about pay the bills and not much more. If you are in a position to set up an additional pension scheme, you do need to do so.
- If you have the option to join a final salary pension scheme, this can be highly advantageous. However, you should always take independent financial advice or pension advice before deciding to do so.
- If you are in a defined contribution or money purchase scheme, you will have to buy an annuity with the fund that has built up. It is crucial that you don’t just take the first annuity that is offered to you. Annuities vary enormously. It’s essential that you shop around and take financial advice.
- Before making any decisions about your pension plan you need to work out exactly what you personally are looking for from a pension – i.e. when you want to retire, what sort of income and lifestyle you want in retirement etc. To help you clarify these points in your own mind, and to assist you in making your plans, the best thing would be to take pension advice from a financial adviser.
Whatever type of pension you qualify for or are looking for, it can be very complicated to find out all the information. Yet it’s so important to ensure you are as well provided for as possible in your later years – even if they seem a long way off at the moment! Taking pension advice can be the best way to find the pension provision that is right for you and your family.
EB May 2008