Retirement Planning is increasingly in the news, as it becomes clearer that the vast majority of the British population is not making adequate plans to provide a suitable level of income once they stop work.

As life expectancy increases and the number of retired people are set to rise, it is increasingly difficult to see how the State Pension will do any more than provide a subsistence level of income.

The Government have proposed to simplify the regulations relating to pensions in April 2006, but for the present time there are a vast range of different pensions and pension regimes in place.

Why do I need to have pension advice?

Pensions are the most tax-efficient way of building up funds for when you finally stop working. If you do not already have a pension, we can advise you about how much to pay into a pension, and which type of pension most suits your requirements.

In addition to new pensions, most people have built up pensions with several different companies over the course of their working life.

In April 2001, the advent of Stakeholder Pensions led to many companies reducing the charges on their existing pension contracts. However, many companies decided to maintain their existing level of charges.

A further consequence of the changes to pensions in 2001 is that many companies opted to close their pensions to all but existing customers. This has meant that many companies are now operating closed funds, which may not have the same investment flexibility as funds attracting new planholders.

As Independent Financial Advisors; we can review your options and advise you whether or not to transfer your existing funds and future contributions.

Until simplification comes in, most people could have any of the following pension contracts: -

Retirement Annuity Contract (RAC)

These were available to individuals not in a company pension scheme, with a start date prior to 1988. Typically used by the self-employed, RACs are particularly useful for high earners wanting to make large annual contributions, and many of them offer guaranteed annuities at the end of the term. This is where the pension fund can be used to buy an annuity or lifetime income at a predefined guaranteed rate. Because these rates were issued at a time when interest rates were much higher than the market rates now, guaranteed annuity rates are now a valuable benefit.

Personal Pension Plans

These became available from 1988, and offer a highly tax-efficient way to save for retirement. Basic rate and non-taxpayers enjoy tax relief of 22% on the contributions, so that for every £100 gross pension contribution, the planholder only needs to pay in £78 net. For higher rate taxpayers, there is a further 18% tax relief available via their annual income tax self-assessment.

Maximum Contribution limits are based on age and net relevant earnings, although since April 2001 most people under 75 can pay up to £3,600 per year into a personal pension, regardless of earnings (with the exception of those people earning over £30,000 in company pension schemes).

Stakeholder Pension Plans

These are simply a variant of Personal Pension plans, where there are certain rules about the maximum charges allowed, the minimum contribution allowed, and the requirement for companies employing more than 5 people to offer access to a Stakeholder Pension Scheme. They have been available since 2001.

Self Invested Personal Pensions (SIPPs)

These are a variation of personal pensions, and are a vehicle for enabling investors to have more choice over where they invest their pension funds. There are certain restrictions on investments, but the most common use of SIPPs is to invest in commercial property. They can also be used to hold individual shares and other investment funds not normally available through personal pension plans.

Appropriate Personal Pensions

These have been used since 1988 for those employed people wishing to contract out of the additional State Pension scheme – previously known as “SERPS” and now known as “S2P” (Second State Pension). Individuals receive a contracting-out rebate in return for giving up their right to S2P and Appropriate Personal Pensions are used to accept such payments.

Group Personal Pension Plans

These are pensions where the employer offers access to personal pensions via the company, but where the contribution and benefit rules are under personal pension rules. It is normal for the employer to make a contribution. Sometimes membership is dependent on the employee making a minimum contribution and sometimes employee contributions are voluntary. The individual can usually continue Group Personal Pensions if they leave the employment of the company sponsoring the scheme.

Contracted Out Money Purchase Schemes (COMPS)

These are company pensions, where the company contracts their employers out of SERPS (now S2P) and usually makes additional employer contributions into the scheme. Money Purchase Schemes are now the most common form of pension scheme as the company can budget for the level of contributions. The employees final pension will be determined by the amount invested, how well the investments perform, and the age at which the employee chooses to take retirement. Where a company only paid in the contracting-out rebate, this meant that the employee could not pay into a personal pension. However, since April 2001, those employees earning less than £30,000 can now pay into a personal pension as well as belong to a COMP scheme.

Contracted In Money Purchase Schemes (CIMPS)

These are company pension schemes whereby the employer pays in contributions to the scheme on behalf of the employee. Some schemes require the employee to pay in a contribution and some allow voluntary contributions to be made. Once again the final pension is based on the level of contributions made, how well the investments perform, and the age at which retirement is taken. Once again, since April 2001, those members of CIMPS earning less than £30,000 per year can also pay into personal pensions. The decision as to whether or not to contract in or out of S2P is left to the individual employee.

Executive Pension Plans (EPPs)

Executive Pension Plans are subject to Occupational Rules but are essentially used by controlling directors and key employees to provide retirement benefits. They are money purchase schemes so that the final pension is based on the investment performance of the funds chosen. With the changes to pension regulations it is important for Controlling Directors to take advice and make sure that their EPPs are still the most appropriate means of planning for retirement.

Final Salary Pension Schemes

These are also company pension schemes, but the final pension benefit is based on the number of year’s service and the final salary of the employee. This is often seen as the best type of pension, because the employer has to guarantee that they will provide the benefits promised. This means that the employee’s pension is not reliant on investment performance, and the employer is required to ensure that the pension fund is funded sufficiently well to provide the promised benefits.

This type of pension scheme is now less likely to be available to new employees, as the cost of providing and securing these benefits is becoming prohibitive to employers.

What should I do?

If you have any of the above pensions that you need help on, then please contact us at County Financial Management. Contact our pensions specialist Brian Gannon, via e-mail or telephone (01279) 755950 for an initial discussion.