I had intended looking at getting the best from your holiday cash on my regular Reporting Scotland slot this week but my mailbag (or more correctly my email in-box!) is still so full of pensions queries that we decided to cover this again, and I’ve decided to have another blog on the subject.

I want to cover two specific areas that lots of you have been writing in about. Firstly why have a pension in the first place and secondly what should you do with old pensions that relate to previous jobs?

The why question is simple really. If you don’t have a pension at work, and you don’t set up your own then you will only have the Basic State Pension to fall back on – assuming you qualify for that – and that’s currently under £100 per week. So if you’re happy with that, don’t read any further!

If not then you need a pension. Actually you don’t. What you need is money when you retire. It’s just that for the majority of us the best way to provide that money tax efficiently is by paying into your employer’s pension or setting up your own.

If you know you’re going to win the lottery on your 60^th birthday or that your parents will leave you a couple of million when they die then again you can stop reading now!

Pensions are no more than tax efficient savings schemes. You pay money in now, you qualify for certain tax reliefs on that investment, the money is allowed to grow in a fairly tax efficient fund and when you take the money back at retirement some of it is tax free! It’s a no-brainer really, but it has to be planned and it should be planned along with the rest of your finances to make sure that you have money available at the times in your life when you are likely to need it.

The second point that lots of you have been asking about is what to do with the old pensions you have from previous jobs. And the answer is to get them all together and ask someone who knows whether there is a benefit in consolidating them all into one investment, or whether they can all be rolled into your existing occupational pension if you have one.

It will cost you money to do this but it is likely to mean that you will have a much more streamlined pension strategy going forward and that all of your pensions will work more effectively to produce a better benefit for you at retirement.

 

 

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“It’s no go the picture palace, it’s no go the stadium,
It’s no go the country cot with a pot of pink geraniums.
It’s no go the Government grants, it’s no go the elections

Sit on your arse for fifty years and hang your hat on a pension.”
Louis MacNeice

 

 

I’ve been doing some work for a variety of BBC programmes recently about pensions and retirement and it’s clear from some of the phone calls and emails we’ve been getting from viewers and listeners that there is still a lot of confusion out there. There are still lots of you who think that Louis MacNeice’s words are true and that your pension will automatically come to you when you retire. Unfortunately that’s not the case any more, if it ever was and I thought that it might be useful to pull some of the information together here to help you understand the different pensions that are available and how they can help you plan for retirement.  It’s not exhaustive and at times it might seem overly simplified but hopefully this blog will help you understand what you need to do if you’re not already doing it and what you may need to change if you think you are!

As well as not being exhaustive, and a bit simplistic, most people find pensions a real turn-off, partly because they get a lot of bad press and partly because we don’t need them until we’re older and so we tend to put off thinking about them as long as possible. But please read on because they are important and as soon as you grasp how to make them work for you, the easier it is to plan effectively.

 

The State Pension

 

The Basic State Pension is available to everyone who has paid enough National Insurance contributions during their working life. The definition of ‘enough’ is long and dependent on a range of factors and is described in more detail than I can go into here on the Pension Service website at www.thepensionservice.gov.uk

The Basic State Pension is currently £95.25 for tax year 2009/10 but may be supplemented by Pension Credit depending on circumstances, and again described in detail on the Pension Service Website. If you are unsure whether you will qualify for a full State Pension then you can complete from BR19 and ask the Service for an estimate of your entitlement at retirement.

If you are an employee you may be entitled to additional benefit from the Second State Pension (previously known as SERPS). It may be that you have chosen to ‘contract out’ of the Second State Pension in which case your National Insurance contributions that would have paid for this benefit will be diverted to your own arrangement. If you are currently contracted out it may be worth looking at going back into the Second State Scheme.

 

 

 

Occupational Pensions

 

There are two main types of Occupational Pensions, although many employers are now restricting access to the more expensive final salary Scheme in favour of Money Purchase Schemes that allow them to control cost more easily.

 

Final Salary Schemes

 

With this type of scheme your pension in retirement is based on the length of service you have and your final salary. With the best of these schemes someone with forty years service could expect a pension of two thirds of their final salary although you may have the option of taking some of this pension as a tax free lump sum when you retire, thereby reducing the annual pension you will receive thereafter to around half of your final salary.

Some final salary schemes are still free - your employer will pay all of the cost of your benefits, but this is rare nowadays. Most are funded by a mix of employer and employee contributions. Public sector schemes are a good example of this with employees usually paying around 6% of salary and the employer paying the balance. Most of these schemes will also provide valuable life assurance benefits, with up to fours years’ salary being paid out on death. 

 

Money Purchase Schemes

 

These schemes operate in a similar way to personal pensions. You, or your employer, or a combination of both, will pay money into a pension and the final value will depend on the investment growth achieved by the money that is being invested. So there is no guarantee on the level of income you can expect to receive at retirement.

Investments are varied and carry different risk– you can leave your pension money sitting in a deposit account, you can use your entire fund to buy shares in one company or you can go out and buy a commercial property that you can then rent back to your business. You need to take advice before deciding which type of investment is most appropriate for you. See more on personal pensions below

 

 

 

Personal Pensions

 

If you are self employed, or don’t have an occupational pension then any money you want at retirement will have to come from your own savings, and the main savings vehicle that people use for retirement planning tends to be a personal pension, largely because it is a tax efficient savings scheme that allows you to put aside some of this year’s income to use at some point in the future. 

You put aside money every month, or every year, and that money is invested on your behalf – usually in a mix of Stock Market Funds, but importantly in these days of Stock Market volatility it could also be in Cash, Fixed Interest or Property depending on the way your pension is set up and how much investment risk you are prepared to take. When you get to retirement age you can either purchase an annuity (i.e. an income for life) or use the value of your fund to provide an income within certain limits. Up to 25% of the value of your fund can usually be taken as a tax-free lump sum.

Any investments you make into a personal pension are eligible for tax relief at your highest rate of tax, subject to limits. So if you are a basic rate taxpayer each £100 will only cost you £80. This reduces to £60 if you pay tax at the top rate of 40% (but see below for details of proposed changes to tax relief).

 

 

Self Invested Personal Pensions

 

Self Invested Personal Pensions (usually known as SIPPs) are fairly new arrangements that allow anyone, self employed or employed, who is not a member of an occupational pension scheme, to take greater control over their retirement planning than traditional pensions allow. These Schemes can be run independently of traditional insurers, and if set up in this way the costs involved are all laid out in the open rather than in a confusing array of ‘initial charges, bid/offer spreads, and other nebulous costs that only insurance company Actuaries understand.

SIPPS allow you to invest your Pension Fund in a wider range of investments than traditional personal pensions, including the shares of single companies, and there are now a number of SIPP providers who operate an inexpensive on-line service for those investors who are only ever likely to use this type of pension to invest directly in the Stock Market. A scheme set up in this way could be used to mirror an existing equity portfolio, or you could take a completely different approach with your pension money depending on when you felt that you would be likely to draw on the benefits.

Although these share-only SIPPS are popular it is the ability to invest in commercial property that has really made them attractive in recent years. SIPPS are able to purchase property that can then be leased back to the member’s company, allowing the business property to grow in a tax efficient fund. It is possible to ‘gear’ your pension fund by borrowing to help with the property purchase, and for any borrowings to be repaid via the commercial rent that  would be paid to the pension scheme by the company.

 

 

Pension Changes Proposed in this Year’s Budget

 

Alistair Darling used his Budget last month to introduce the prospect of reduced tax relief on pension contributions for high rate taxpayers earning over £150,000 a year. While the rules are not yet clear, and a period of consultation is due to commence soon, other taxpayers need to realise that this could be the thin end of the wedge, and the start of a journey that could mean the end of all higher rate relief on pensions, with relief at some point in the future only available at the 20% rate of tax.

If that is the case then it would make sense for anyone currently paying higher rate tax, or on the margins of it, to look  at the best way of planning to take advantage of a tax relief that might not be around in four or five years.

 

 

 

 

 

 

 

 

 

 

 

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