Investments / Savings
We all like the idea of a secure and comfortable life once we decide to give up work. Maybe you're looking forward to spending more time with your grandchildren or friends. You might want to travel, perhaps, or take up new interests.
Whatever you want to do, a better understanding of pensions will probably help you build a better future.
Start a pension today from just £20
With a Stakeholder Pension, you can start building up a private pension to help give you a more secure and comfortable retirement. The charges are often lower than other pension plans and you can start from as little as £20, adding more when you can afford to. You'll also get tax relief on your payments.
Stakeholder Pensions at a glance
- Start with as little as £20
- Get tax relief at your highest rate on your payments (subject to HM Revenue & Customs limits)
- Stop, restart or change your payments, or transfer your fund to another pension provider, all without penalty
- Benefit from our low charges
Starting a private pension is simply a way of building up a tax-efficient sum of money (sometimes called a 'pension pot') to provide an income when you retire.
The tax benefits of a pension will depend on your personal circumstances and tax rules, both of which can change
What types of pension are there?
The Basic State Pension
This is paid subject to your National Insurance (NI) contributions record (how many years you've paid NI on your earnings). With full contributions (44 years for men and for women born after 06/04/1955) it currently pays £87.30 a week for a single person and £134.75 for a couple. If you don't have enough contributions or credits, your state pension will be less.
The State Second Pension (formerly SERPS)
As well as the State Pension, you may also be entitled to this additional State Pension, which is related to your earnings while you have been employed. You can obtain a pension forecast (known as a BR19) of what you will get from the State, which includes both your Basic Pension and any additional State Pension entitlements.
To get a forecast, either:
*apply online at thepensionservice.gov.uk
* print out form BR19 at thepensionservice.gov.uk and post it
* call 0845 300 0168 and request a form
Private Pensions
Private pensions are sometimes provided by your employer (Occupational or Group Schemes).
Or, we can arrange a pension directly from a 'pension provider'. These include:
Stakeholder Pensions - an easy, low-cost way to start building up a private 'pension pot' with payments from as little as £20
Personal Pensions which normally have higher minimum payments, and often offer a wider investment choice than that normally available for Stakeholder Pensions.
A good starting point, though, might be to ask these questions:
Do I believe the State Pension will give me enough income to maintain my current lifestyle?
If you think you would need more than the pension available from the State, you should probably start to plan your private pension sooner rather than later.
Does my employer have a pension scheme and would they contribute to my pension?
You should certainly consider this, particularly if your employer will contribute.
Is there currently a pension provision in place for me?
You could be a member of your employer's Occupational Pension Scheme or Group Personal Pension, for example. Alternatively you could already have a Personal or Stakeholder pension.
Do all private pensions receive tax relief?
Usually, any payments that you make into a Personal or Stakeholder Pension plan qualify for full tax relief. So, effectively, the taxman 'tops up' your pension.
If you are a basic rate tax payer
If, for example, you make a net payment of £78 a month to your Personal or Stakeholder Pension plan, HM Revenue and Customs will top it up with an additional payment of £22 (basic rate tax relief). You now have £100 a month (gross) going into your pension plan.
What you pay: £78
Add tax relief: £22
Total going in to your pension: £100
If you are a higher rate tax payer
If, for example, you pay the same £78 you'll get the same automatic £22 top-up. You then claim the difference between basic and higher rate tax relief in your self-assessment tax return. This is currently £18, so your £100 gross payment effectively costs you only £60 under current tax rules.
What you pay: £78
Add automatic tax relief + £22
Additional tax relief you reclaim:
£18
Net cost to you: £60
Total going in to your pension: £100
Do all private pensions have the same charges?
Most providers charge for the set-up and administration of your pension.
Stakeholder Pensions have to satisfy a number of minimum government standards to ensure that they offer value for money and flexibility. This includes a maximum annual management charge of 1.5% for the first 10 years, which then reduces to 1%.
Personal Pensions can have a different charging structure.
Is there any upper limit to how much I can pay in?
There is no absolute upper limit on the payments that can be made to your pension plan each year.
However, no tax relief is available on any payments you make that exceed your relevant UK earnings, or £3,600 (gross) if higher.
In addition, an Annual Allowance applies to the amount of payments made to your pension plan each year. If the payments made to your pension plan in any year exceed the Annual Allowance, you will be liable to pay a tax charge on the excess. The Annual Allowance is set each year by the Government. For the 2006/2007 tax year, it is set at £225,000. The Annual Allowance will not apply to payments made to a pension plan, in the year in which all benefits are taken.
A Lifetime Allowance, also set by the Government, applies to the total value of pension benefits you can receive from all your pension plans. A tax charge must normally be deducted from any benefits that exceed the Lifetime Allowance, before they can be paid. The Lifetime Allowance for 2006/2007 tax year is set at £1.5 million. It will increase to £1.8 million by 2010/2011, and will be reviewed every five years.
The above information is based on current tax rules which may change in the future.
How will I know how my pension plan is performing?
Your chosen pension provider will send you an up-to-date Pension Benefits Statement each year, which shows the value of your plan.
You can also check the performance of the funds online with most pension providers.
SimpliIndependent will also review your pension each year in your free annual review.
At the moment, you can decide to take your Personal or Stakeholder Pension benefits any time between age 50 and 75, even if you're still working. From 6 April 2010, the Government has raised the minimum age at which you can normally start taking your pension from 50 to 55.
What will I get when I take my pension?
At your selected pension date, you have a number of options to choose from. You don't have to make these decisions until you are approaching retirement.
- You can use your fund to provide a taxable pension, giving you an income for life. This involves buying an annuity.
- You can normally take up to 25% of your 'pension pot' as a tax-free cash lump sum, using the balance to provide a (reduced) taxable pension for life.
- You can give up part of your pension, to provide a taxable pension for your husband, wife, registered civil partner or other dependant after you die.
- You can choose whether you want your pension to remain level throughout your life or to increase automatically each year.
- You can delay buying your pension, but still take a taxable income by moving to Income Drawdown.
- You can get an idea of what may be available at retirement by asking for a Personal Illustration.
To get the full picture, you may want to add your State Pension entitlements as well as any current or old employer pension schemes you are a member of.
The Pension Process:
Stage 1
You decide what type of pension you want and choose a provider
Stage 2
You decide when you'd like to retire and how much you can pay in
Stage 3
You start making payments and get tax relief
Stage 4
You review your pension arrangements regularly
Stage 5
You choose how you want to take your income
Stage 6
You start taking your pension at your selected pension age. Minimum 50 (55 from April 2010).
If you wish to discuss your options further please contact Simpli Independent, we’ll be happy to talk you through your options.
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