Personal Pensions Guide
Personal Pensions and Stakeholder Pensions
How much do I need before I can retire?
What is a Personal Pension?
Tax Relief When can I get at the money? Stakeholder Pensions Transferring Your Pension Taking out another pension scheme Keeping track of your pension Take account of your annual personal pension statement |
Personal Pensions and Stakeholder Pensions |
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Personal Pensions and Stakeholder Pensions allow people who are either self employed, or work for a company that does not provide a company pension scheme, a way to climb aboard the personal pension train.
Before jumping in and starting a private pension, it is well worth sitting down with a coffee, pencil and paper, and figure out just how much you will need annually during your retirement. Hopefully, by the time you retire, you will have paid off all the major purchases that you had made whilst you were working, thus reducing the amount of money you will need to live on during your retirement, but this needs to be balanced with what extra outgoings you will need to take care of yourself, as you become older.
You will also need to decide at what age you wish to retire, bearing in mind that the earlier you retire the less pension you will get. This is due to the fact that pensions are payable for life. Another thing to consider is what income will you receive from your state pension? And if you have any additional assets, what income will you receive from them? The outcome of your calculations will give you an idea of how much you will need to contribute to your personal pension scheme per month to achieve the annual amount your will require in your retirement. However, due to the cost of living constantly rising, it is difficult to estimate the exact amount you will need to retire on, so it is a good idea to keep monitoring your personal pension on a regular basis.
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What is a Personal Pension? |
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A personal pension is a fund, into which you make regular payments, the fund can be invested in various ways such as:
Gilt and fixed interest (bond) funds
UK and overseas equity funds
Risk-based managed funds
With profits funds
You will need to discuss your particular requirements with a financial adviser, so as to ascertain what exactly is the right pension vehicle for you.
The money you pay into your pension fund will most likely to be considered as net of basic rate tax. Good news for you, because for every 100.00 GBP you pay your private pension provider, they actually put into your fund 125.00 GBP. You have to thank UK Government for this as your private pension provider can claim the extra 25.00 GBP for you.
This is how it works, when you give the private pension provider 100.00 GBP, this equates to 80% of the total you earned before tax. So, the pension provider works out what 100% would have been (£100/80 x 100 = £125) and claims the £25 back for you.
For those of you unlucky (or lucky) enough to pay tax at the higher rate of 40%, your private pension will still receive tax relief at the basic rate, plus you can claim the higher rate tax relief on your tax return.
You can take up to 25% of the amount of your personal pension fund as a tax-free lump sum (providing you are under 75 years of age). With what is left, you must buy either an annuity, or in the short term, draw an income from your personal private pension, this is known as ‘Income Drawdown’. All income from your private pension is taxable (the taxman giveth and the taxman taketh away). When you die, unless you have made provision for a guaranteed term annuity, your income ‘dies’ with you. There are, however, different types of annuities on the market that can cater for specific needs and circumstances, so if you are looking to provide for your dependents, then get in touch with a pensions specialist who can put you on the right track.
The minimum payment is low and there is no charge levied for stopping payments and restarting them at a later date, you can also change to a different pension provider without the provider you leave charging you.
Stakeholder pensions are very similar to other personal pensions, you contribute into your pension to build up your pension pot. The fund managers of the stakeholder pension scheme invest the money contributed by you and build it up into an amount you can purchase an annuity with, from a life insurance company of your own choosing.
Just exactly how much you will end up with to buy your annunity will depend on how much you have put into the stakkeholder pension fund, and how successful was the stakeholder pension fund manager in investing your stakeholder pension fund.
If only life were that simple! There is no doubt you will incur some kind of penalty clause regarding transferring your personal pension fund from one personal pension fund provider to another.
The first thing to do is to ask your personal pension fund provider for a transfer value so as to find out just exactly what it is going to cost you to transfer your personal pension fund.
Secondly, do the maths to see just exactly what the benefits are of transfering your fund, and if it is still worth it after you have paid the penalty. Check out all aspects of both personal pensions to make sure that you are making the right decision. Compare the projections regarding final income, again making sure that you go for the personal pension that is right for you. Remember, there is no ‘cooling off period’ for transferring pensions, so once you sign on the dotted line, there is no going back. It is worth noting that there is no charge incurred for transferring a stakeholder pension.
An alternative to transferring your existing personal pension to another provider, is to start up a new personal pension scheme in addition to your existing one. By doing this you avoid the penalty that would be levied against you for transferring your private pension from one provider to another. It is worth checking to see if you can reduce payments to your existing pension and pay more into the new scheme instead. Beware, however, as there may be charges for doing this. Always get advice from a pensions specialist before embarking on making any major changes to your pension arrangements as the consequences could be very significant for you.
Once you have sorted out your personal pension requirements, don’t just forget all about it until you reach retirement age, because if you do, you could be in for a very nasty surprise when you come to purchase an annuity (the saying “investments can go down as well as up” springs to mind). Also, circumstances may change over the years between the time you originally took out your personal pension plan, and the time you wish to claim it. It may well be that you want to pay additional contributions into your personal fund to bolster it up, the closer you get to your retirement age.
When you get your annual private pension statement from your existing provider, don’t file it in the bin, sit down and take a little time analysing it, it will be time well spent, make sure that your personal pension is still ‘on track’ to provide for your retirement, and if not, investigate alternatives that will put it back on track. The statement will show your pension income in today's prices. To find out what the retirement value of your pension will be, you will need to obtain from your private pension provider a forecast of what you can expect to receive at your retirement age. Some personal pension providers even offer a combined private pension forecast which will give you an estimate of what you can expect to receive from the combination of your private personal pension plus your state provided basic pension. If the estimate is not enough to cover your retirement plans, then you may have to increase your private pension contributions to make up the shortfall.
