E CAPITAL INVESTMENTS
Do you fancy the idea of living on about
£100 per week when you retire?
That's pretty much the prospect unless you make additional pension arrangements either by setting up a personal pension or by being part of a company scheme.
Before seeking advice on pension provision it's worth getting the basics straight first.
Company pensions are set up by employers, for their staff. They can be “final salary” or “defined benefit” schemes. These are schemes where a Trust is set up for the members. Money is paid in from the company, the members or both. The money is then invested.
Members get benefits in accordance with their contractual terms (typically a proportion of the final salary for each year that they have worked there). These are expressed as a pension value, but normally members can opt to reduce their pension by taking some of the money as a cash lump sum on retirement.
The fund is monitored by Actuaries, whose job is to determine whether or not there will be sufficient assets to meet the pension payments. If the fund is doing well, the company, and in theory even the employees, might be able to reduce or stop their payments. If the scheme does badly (e.g. its investments fall in value) then the COMPANY is expected to make up any shortfall.
Alternatively, an employer may set up a "defined contribution" or "money purchase" scheme. In this case the monthly contributions are put into a fund earmarked for that particular employee who, when he or she retires, is able to take a tax free lump sum and, with the balance, buy an "annuity."
Annuities are sold by pensions providers and insurance companies and guarantee the policyholder an income throughout his or her retirement.
Many employees prefer to set up personal, "portable" pensions of their own. Those who are self-employed also do so, of course. Use your pension for a number of reasons, invest in your property and get a brand new roof to give your home a modern finish.
In this case, as with defined contribution schemes, contributions are set aside in the pension plan and used to purchase an annuity before age 75.
One of the great attractions of pension schemes as a method of saving for retirement is that there is tax relief on contributions up to government set contribution limits. There is no other investment you can make which will give you 22% or 40% tax relief, depending on the highest rate of tax you pay.
Which sounds most appealing, paying tax to the government or saving it for your old age?
With government's introduction of Stakeholder pensions in 2001 there are now plenty of low-cost pension offerings being put out by the pensions providers to enable most people, especially those on lower incomes (even those not working), to set aside funds for their retirement.
And the key to Stakeholder as to any other pension is to start contributing as early as possible and keep making contributions for as long as possible. That way your pension pot has time to fill up and for the investment returns on the fund to compound through reinvestment over many years. The result should be a significant sum of money to invest when you retire.
If you haven't set up a pension yet, then armed with these basics it is now time to ask us to obtain some quotations from pension providers. There is no time like the present. Once you have a range of options to consider you can then compare and contrast what's on offer.
No one will suggest that a pension should be the be all and end all of your personal finance arrangements. But putting one in place is an important long-term investment decision. Even if retirement seems a long way off right now, just think of what life would be like if a state pension of the equivalent of £100 a week was all you had to live on…
A stakeholder pension could be a good choice if:
• you are self-employed
• you aren't working but can afford to pay for a pension
• your employer doesn't offer a company pension scheme
• you do not pay into a company pension
• you are on a moderate income and wish to top up the money you would get from a company pension
To help you decide, use the Financial Service Authority stakeholder pensions decision tree .
You can work out how much your payments could be worth when you retire using the Financial Services Authority (FSA) pension calculator.
Estimate the value of your future pension with the FSA pension calculator
More useful links
The Office of the Pensions Advisory Service (OPAS) helpline deals with general enquiries about personal pensions, including stakeholder pensions, and occupational pensions. It is open Monday to Friday from 9.00 am to 5.00 pm on 0845 601 2923.
Leaflets available for download from The Pension Service
Financial Services Authority booklets and factsheets