Pensions

WHY SAVE FOR YOUR RETIREMENT?

• State pensions may not be adequate to provide a comfortable standard of living in retirement and should be considered as a minimum

• People are living longer

• Extra pension savings make retirement more comfortable

To encourage you to save for your retirement in a private pension, the Government tops up your contributions by giving you back the tax you have already paid on your contribution.

WHAT TYPES OF PENSION ARE THERE?

In addition to the state pension, there are the following types of private pension:

• A work-based pension arranged through an employer who may also make a contribution

• A personal pension (including Stakeholder schemes) open to nearly everyone and especially useful if you are self-employed or your employer doesn’t run a company scheme.

Your contributions form a pension fund, which is invested over the years until you retire.

PENSION ANNUITIES

An annuity allows you to use your pension savings to effectively buy a monthly income for the rest of your life.

People who save in a money purchase (“defined contribution”) pension scheme (personal, stakeholder or some occupational pensions) generally purchase an annuity with the money saved in their pension at or after retirement. Up to age 75 they may take income from the fund, within certain limits. But, under current rules, they must buy an annuity by age 75. They have the option of taking a tax-free lump sum of 25% of the money saved in the pension, with the remaining money used to purchase an annuity. This annuity will then provide an income for life. For those in an occupational pension scheme, the scheme trustees will often arrange this on their behalf.

There are different types of annuity; it is important to identify which is the right one. For example:

• Income from a level annuity will gradually decline in value over time as prices rise, but some annuities provide an income that gradually rises over time in line with prices

• Joint Life annuities provide an income for a dependent after the annuity holder dies, whereas income payments from a Single Life annuity end when the annuity holder dies

• Certain types of annuity will pay a larger income if you have a lower than average life expectancy, for example due to serious ill health or lifestyle factors.

GETTING STARTED

This Government website is a useful starting point: www.thepensionservice.gov.uk

The Financial Services Authority has a helpful guide for consumers at: www.moneymadeclear.fsa.gov.uk

To get an estimate of the amount of pension income you could get when you retire, based on your current and any additional savings you make, you should look at the Pension Calculator: www.pensioncalculator.org.uk/pages/home.php

The Association of British Insurers provides information at: www.abi.org.uk

LOOKING AHEAD

The Government has announced the establishment of a new scheme of ‘personal accounts’ from 2012 designed to help and encourage employees on low to moderate incomes to save for their retirement.