Pension Planning

What is Retirement Planning?

It is generally accepted that retirement planning is about building up sufficient assets during your working career so that you have sufficient financial resources to enjoy your retirement.  Although most attention is placed on the provision of a pension, it is also wise to consider the timing of debt repayment to ensure the majority is repaid before you retire, this is especially important on any mortgage on your home. Furthermore, we recognise that other forms of tax advantaged saving are available other than a pension (ISA's, property etc) that may be more attractive based on someone's personal circumstances, but this is outside the scope of this article.

Over recent years there has been considerable political comment and press coverage regarding the level of the State Retirement Pension.  Large numbers of people believe that they will require more money after their retirement than the state pension can offer.

These feelings often lead to people beginning their long term planning with regular contributions into a pension scheme. Pension planning is normally a long- term commitment.  The Government is trying to encourage more people to build up a pension fund of their own with various initiatives including the introduction of Stakeholder Pensions and permitting people to contract out of SEPRS/S2P.  The decision to contract out is complex and PSFM Ltd is unable to advise in this area.

Tax Incentives

Pension funds in the UK benefit from significant tax incentives.  These make the growth on the value of a pension fund tax-free and allow some of the fund to be drawn in the form of a tax free lump sum.  In addition any payments made by you qualify for tax relief.  The majority of pension plan types give tax relief at source, which means that you only pay the net amount (e.g. a £100 contribution costs you £80).

There is not a long time before I wish to retire

Even if you do not have a long time to save for your retirement you should still consider retirement planning. Within recent months there have been many changes to the charging structures applied by the Pension Providers.  This means that even if the period until your retirement is quite short you should still get a good overall return on the money you invest. Investment returns can fluctuate and cannot be guaranteed.

When can I retire?

Many people focus their planned retirement on age 65 (men) or 60 (women).  This tends to be for historic reasons, based on the age at which people can claim their State Retirement pensions.  Recently the State Retirement age for all women born after 6th April 1955 changed to 65, the same as for men.

If you intend to retire before the State Pension age, additional planning is normally required as you will not be able to claim your state pension until you do reach State Pension age.  Therefore greater importance is placed on the need to provide a sufficient income to be available once you do stop working.

If you are making private pension provision under normal circumstances, benefits cannot be drawn from a pension plan unless you are aged 50 or over (men or women).  This will change to age 55 from April 2010.

There are some occupations where special reduced retirement ages operate.  This allows the benefits of a pension plan to be drawn prior to age 50.  Normally reduced retirement ages apply to employments like professional sports people, or some types of Financial Dealers.

Do I have to retire at State Pension Age?

You are under no obligation to retire at the State Retirement Age.  If you want you can delay the drawing of your state pension.  During the period that you defer receiving your State Pension it will be increased, so that once the pension is started the weekly payment will be higher than would have been the case at your State Pension Age.  However, you are normally better to draw the pension now and save any excess income that is not required.

The start date of receiving benefits from Private Pensions cannot normally be extended beyond age 75. Whether the delay in the start of the pension payments will result in a higher income being paid to you will depend on the terms of your particular pension plan.  You should contact us for assistance.

When I draw my Pension must I buy an annuity?

A pension annuity is bought by using your pension fund, at the time you retire, to provide an income in retirement.

Many private pension plans now allow you to draw your benefits at the time you wish to retire but do not force you to purchase an annuity.  Your income is provided by making withdrawals directly from the pension fund which remains invested.  Under current rules you can defer the purchase of an annuity until the time you reach age 75.  In 2006 new pension legislation could provide an opportunity to defer annuity purchase after age 75 also.

If you wish to investigate the option of deferring the purchase of your annuity when you retire please contact us for assistance.

Should I set up a Personal Pension or a Directors Pension?

There are advantages and disadvantages of both schemes, however, as a general rule you will probably be able to pay in much larger contributions to a Directors Pension Scheme.  It is very important to obtain independent advice before making a firm decision.

What is a Small Self Administered Pension Scheme and what are the advantages?

This is an extremely flexible form of Directors' Pension Scheme available to Companies with 12 or less Directors.  Advantages include the ability to purchase the Company's premises and subsequently rent it back to the Company, loan facilities to the Company on an unsecured basis, the ability in certain circumstances to purchase the Company shares and greater investment freedom including the ability to invest directly in stocks and shares.

What is a Self Invested Personal Pension and what are the advantages?

This type of Scheme is in many ways similar to a Directors Small Self Administered Pension Scheme as it offers, within Inland Revenue guidelines, complete investment control and freedom to the investor.  Once again property can be purchased although the loans to the business will need to be secured.  These types of scheme are particularly attractive for professional people wishing to purchase their practice building. Independent advice should be sought on both types of scheme.