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Pensions.


“Pensions are for old people”

Right?

Wrong!

Pensions represent your future, and as such should not be ignored. The choices that you make now could mean the difference between living in poverty in your old age, or living in luxury.


What are pensions?


Pensions are long-term investments that are designed to provide you with an income when you come to retire and stop working, and, as with any form of saving, the earlier you start the more you will receive at the end.

There are several types of pension that may be available to you. These include:


Although banks, building societies and other finance companies will only offer you personal and stakeholder pension schemes, it is important that you fully understand how all pensions work.


The Basic State Retirement Pension.


The Basic State Retirement Pension is a flat-rate pension paid to anyone who has enough national insurance contributions or credits when they reach state retirement age. This is 60 for a woman and 65 for a man, although this is due to change in the future when it will become 65 irrespective of your gender.

The basic state retirement pension will only be paid in full if you have paid, or been credited with, sufficient National Insurance Contributions during your working life.

A person must normally have paid National Insurance Contributions for a minimum of 44 years to qualify for a full basic state pension.


Additional State Pension.


Until 6 April 2002, the Additional State Pension was known as the State Earnings-Related Pension Scheme (SERPS). Since then it has been renamed, and is now known as the State Second Pension.

The State Second pension provides a basic top-up to the Basic State Pension based on your actual earnings. All employees have to contribute towards the Second State Pension unless they have made alternative arrangements by having these contributions paid into their own occupational or personal pension plan. This is commonly known as contracting out of the State Second pension.

From the 6 April 2002, people who are on low and moderate incomes, certain carers, and people with long-term illness or disability may also accrue a right to the State Second pension, even though they are not employees.


Occupational Pension Schemes


Occupational pension schemes are set up by employers to provide pensions and life assurance benefits for employees, for example, a tax-free lump sum payable if they were to die before retirement to their partner or other dependants.

There are two main types of Occupational pension Scheme. These are:

A Final Salary scheme will provide you with a pension that depends on the number of years you have belonged to the scheme, and your salary at or near your retirement date.

A Money Purchase scheme is a scheme where the pension benefits are based on the value of the investment at retirement.

You should ask your employer if they have an occupational pension scheme and what sort of scheme it is.

If you do join an occupational pension scheme, your employer will normally pay money into the scheme, and you will normally pay money in as well. You will normally receive tax relief on any contributions that you make, which gives an additional benefit to having a pension.

As an employee, you have the right to leave, or decline to join, an occupational pension scheme. If you are thinking about leaving an occupational scheme, you should consider the implications of this very carefully, because an occupational scheme is usually far more advantageous than a personal pension.

If in any doubt, make sure you get some Independent Financial Advice. Some occupational schemes may be reluctant to allow you to return to the scheme after you have left to take out a personal pension.

The occupational pension scheme may also be contracted out of the State Second Pension. This means that you will not pay your National Insurance contributions to the government, and instead have these contributions added to the occupational scheme. This will result in you being entitled to the Basic State Pension, and the occupational pension when you come to retire.


Personal Pensions.


You can take out a personal pension (including a stakeholder pension) whether you are employed, self-employed or unemployed. In order to take out a personal pension, you must be aged between 18 and 75 (you can also take out a stakeholder pension on behalf of a child).

If you are an employee who is a member of an occupational pension scheme, you may also be able to take out a personal pension or a stakeholder. However, in order to do this you must not be a controlling director of a company, and your total gross salary must not exceed £30,000.00 a year.

A personal pension scheme will provide one or more of the following benefits:

A personal pension scheme may also be contracted out of the State Second Pension. This means that you will not pay your National Insurance contributions to the government, and instead have these contributions added to the personal pension scheme. This will result in you being entitled to the Basic State Pension, and the occupational pension when you come to retire.


Stakeholder Pensions.


Stakeholder Pensions are another form of a Personal Pension Scheme.

A Stakeholder pension is a low-cost pension that has to meet certain standards and conditions that have been laid down by the government. These standards guarantee that the pension has low charges, payment flexibility, clear terms and conditions, and good all round value.

The Stakeholder standards are as follows:

Any provider who does not stick to these standards is breaking the law if they are calling their pension a stakeholder.

For some people a Stakeholder pension may be a better option than other personal pensions. Stakeholder pensions offer greater flexibility than other personal pensions. Many banks, building societies, insurance and finance companies will offer a Stakeholder pension.

If you are employed, then you may be offered a Stakeholder pension through your employer, as many occupational pension schemes are now being phased out and replaced by Stakeholders.

As a new employee to a company, you may not be able to join a pension scheme straight away, so you should find out under what terms the pension is being offered.

An employer must offer a Stakeholder Pension scheme to their employees, unless the employer has fewer than five employees.


For further activities on pensions please visit www.doughuk.com

Disclaimer,   Target Audience,   Jurisdiction    Last updated & checked: 30/03/2006