Pension Planning
Pension arrangements provide a tax efficient method of savings for retirement.
Personal contributions towards pension plans attract tax relief for the individual at the highest marginal rate payable.
Investments within pension funds grow free of tax although dividend tax credits on share income are not available and therefore not reclaimable to the funds.
Benefits on retirement can be available from age 50 (55 from April 2010) and can include 25% of the fund as tax free cash with the balance providing an income from one of several arrangements.
Due to recent simplification, legislation in April 2006 contributions limits and other restrictions on savings into pension plans have been lifted.
Annual Allowance
Individuals will be able to contribute as much as they want, to any number of registered pension schemes whether occupational or personal.
Tax relief will be available on contributions which do not exceed the high of £3,600.00 or 100% of annual earnings up to a maximum of £235,000 in 2008.
Lifetime Allowance
The maximum value of any individuals pension entitlement will be capped at 1.6 million increasing to 1.8 million by 2010.
There are two most common types of scheme in which pension savings can be made:
1. Occupational Pension Provision
2. Personal Pensions
Annuities:
a) Compulsory Purchase Annuity
b) With Profit Annuity
c) Income drawdown
d) Phased Retirement
Occupational Pension Provision
Employers can set up Occupational Pension Schemes for their employees – these usually fall into two main categories:
1. Final Salary Schemes (defined benefit
schemes) or
2. Money Purchase arrangements (defined
contributions)
Defined benefit schemes are pension schemes promising a given level of retirement benefits often related to final salary. The whole cost of these schemes can be met by the employer, however most schemes’ employees are required to make a contribution.
Defined Contributions Pension Schemes whereby the contribution level rather than the benefit is specified are defined contribution or Money Purchase Schemes.
Stakeholder Pensions can be used as Occupational Money Purchase Schemes and arranged by the employer for the employees. All employers that don’t qualify for exemptions must provide a scheme for their staff to be able to contribute. Although under current legislation employer contributions are optional.
Other versions of Occupational Schemes include Small Self-Administered schemes (SAS). This type of Occupational Pension Scheme is aimed at Controlling Directors in particular, and allow control over investments (small generally means less than 12 members).
Executive Pension Plans are insured Money Purchase Occupational Pension Plans generally designed specifically to invest the needs of Controlling Directors and senior Executives.
Additionally Voluntary Contributions (AVC)
Additionally Voluntary Contributions are paid by a member of an Occupational Scheme to secure extra retirement benefits. This could be money purchase or in the form of buying back years.
Personal Pensions
These are a Money Purchase Pension arrangement available to individuals who are self-employed, or employed. Employees may also elect to contract out of SERPS using this pension plan. Employers may contribute to any employees Personal Pension.
Stakeholder Pensions
Stakeholder Pensions are the centrepiece of the Government’s plan to enable everyone to start building up pension savings. Stakeholders are personal pensions with very low charges (not more than 1% per annum) in which anyone of any age can invest, regardless of whether they have earnings. Contributions are eligible for tax relief. And 25% of the maturity value can be taken in the form of tax free cash.
Self-Invested Personal Pension Plan (SIPP)
A SIPP is a Personal Pension Plan but offers the opportunity to obtain a self invested element chosen by the individual.
Crystalising Events
From 2006 this is the term used to describe the different ways in which benefits are drawn from a registered pension scheme.
There are six types of arrangement:
a. Compulsory purchase annuity
b. With profits/unit linked annuity
c. Income withdrawal
d. Limited period annuity
e. Value protected annuity
f. Alternatively secured pension.
a) Compulsory Purchase Annuity
This is a conventional annuity which provides a guaranteed level of income when policyholders retire from a personal pension.
The pension is provided by using the lump sum available from a personal pension or occupational money purchase arrangement. It can also provide a pension for a spouse or dependant.
b) With Profits / Unit Linked Annuity
This is designed to convert the proceeds of a policyholder’s pension fund into regular income, similar to Compulsory Pension Annuities mentioned above. In addition it allows them to benefit from investment performance of a chosen with profit / unit linked fund provider.
c) Income drawdown
Otherwise known as pension fund withdrawals, this is the drawing of income from a pension fund rather than purchasing annuity immediately. This facility is available under personal pensions and to some occupational money purchase arrangements. Limits apply and at this present time an annuity must be purchased by the age of 75 at the latest.
Changes from 2006
A long standing concern for retirees is that pension savings is that pension savings must be applied to purchase an annuity by no later than age 75. Annuities have become unpopular as rates have become unattractive due to low interest rates and lengthening life spans. Also annuity purchase means exchanging capital sum for a lifetime income which on death there can be nothing left.
To address these concerns there are two new types of annuity available
d) Limited period annuities
These last for up to five years and maybe arranged in sequence.
e) Value of protected annuities
Provide a guarantee that if the annuitant dies before age 75 the dependants will receive death benefits equivalent to the purchase price of the annuity less the payments already received.
f) Alternatively secured pensions
Details of these arrangements are still not finalised (however it is proposed that pensioners will be able to decide at age 75 whether to buy an annuity or continue with their drawdown arrangements in a slightly revised form.
