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Types of Pensions
Here we provide information to help you gain an understanding of the basics of pension provision. We offer impartial advice on all of the types of pensions described below and can help you decide which type will best provide security for your future.
pension schemes for individuals
Stakeholder Pensions are personal pension plans that meet certain statutory requirements set by the Government. For example the provider’s charges may not exceed 1% per annum and there can be no transfer penalties or exit penalties. The minimum you can contribute is £20 as either a single, annual or monthly premium.
Stakeholder pensions are available to everybody, whether or not they are employed, unless they are a company director and/or earning £30,000 or more per annum and in a company scheme. Stakeholder pensions are “defined contribution schemes”, the level of contributions being strictly determined by factors such as the level of earnings and age of the contributor.
Contributions are limited to £3,600 per year, unless you have relevant earnings which do not have a pension arrangement. Depending upon your age you can contribute between 17.5% and 40% of your salary. All contributions benefit from being exempt from tax at the rate applicable to the policyholder.
Personal Pensions are also an option if you are self-employed or if your employer does not run a company scheme. The personal pension plan charges the individual for setting up the plan and these charges may be significant, especially if you have to stop or suspend payment of premiums or change the selected retirement age that you originally gave. Personal pension plans have now largely given way to Stakeholder Pensions.
Self invested pension plans or SIPPs are available to the self-employed and allow the owner to make his or her own investment decisions and to place different assets within the pension fund. The fund can thus contain shares, unit trusts, property etc. all of which benefit from the pension’s tax exempt status.
company pension schemes
Executive plans for directors have the advantage of being “defined benefit” or “final salary” schemes, the level of contributions being linked to the final salary of the contributor. The pension to be paid can be up to two thirds of the final salary of the director, meaning that contributions can be made to ensure that this is payable at the time of retirement. All pension contributions are subject to tax relief at the highest rate payable.
Small self-administered schemes or SSASs are similar to SIPPs only they are for directors of companies. They allow the pension fund to purchase and hold assets on behalf of the company and also attract tax relief at the highest rate payable.
Occupational schemes or company pensions are set up and run by employers for their employees. Either the employer or the employee or both contribute to the scheme on a monthly basis. At present you do not have to join such a scheme, but it is often advisable to do so as the employer will be responsible for many of the costs for setting up the plan and many such plans have additional benefits such as life assurance.
- Traditional occupational schemes have a major disadvantage in that the pension does not belong to the employee and it is not easily portable without penalties being imposed, making it harder to take your pension with you if you change jobs, unless they are within the same company.
- Group Stakeholder pension plans for employees are now the most popular type of occupational pension scheme because of their low charges, flexibility and portability. Each employee within the scheme has his or her own individual pension and if they leave the company they can take their pension with them without any financial penalties.
Important note for Employers: Recent Government legislation dictates that employers who employ over 5 staff are obliged to provide access to a stakeholder arrangement via the workplace, unless they have an existing pension scheme in place that meets the criteria set by the Government.
annuities
At least 75% of a pension fund must be used to purchase an annuity upon the retirement of the policyholder. Annuities are sold by pensions providers and insurance companies and guarantee the policyholder an income throughout his or her retirement. When you buy an annuity you exchange a lump sum for income in the future. Unlike other investments, however, an annuity usually only pays out until you die although you can have an option for guaranteed periods.
The rate of income you receive from the annuity will depend on how much capital you have paid to the insurance company and how old you are. The younger you are the smaller the income you will receive, because the annuity provider will expect you to live longer. Similarly women will be offered lower annuity rates as they are expected to live longer.
With a "life annuity" the insurance company ceases the payments when you die and so you are taking a statistical gamble as to how long you are going to live. Whereas with a “guaranteed” annuity the payments will be made for a fixed term regardless of when you die. You can also take out “joint life” annuities where the capital is handed over to the insurance company which then pays an income for the life of both spouses.
All of the major pension providers and insurance companies provide annuities, however, not only are there several types on offer, their rates can vary considerably. Hunter Hammond Daniel Associates Ltd provide advice with regards to annuities and can help you guarantee a secure retirement by choosing the best one for your circumstances.
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