Pensions

What is a pension scheme and how do I benefit?

What is a pension?

A pension is money paid to you when you reach retirement age although in some instances you may continue to work and defer your pension income till later.  The aim of a pension is to provide you with some form of income during your retirement years.

What is a pension scheme?

A pension scheme is a savings scheme which offers very attractive tax benefits in exchange for you agreeing not to touch the proceeds until you are older.   You put your money in to a pension scheme, that money is invested, its value (hopefully) grows and at the end, you withdraw the proceeds and use it to pay for goods and services.  In other words the proceeds from your pension scheme are used to provide a pension income when you are older and no longer want or are able to work.  A pension scheme is like a savings plan but where you cannot touch the proceeds until you are at least 55 – and at least 75% of the value it achieves must be used to provide an income for the rest of your life.

A pension plan is another term for pension scheme.

Would you benefit from a pension plan?

Yes, if you plan to enjoy a retirement where you have more income available than that provided by the basic state pension.  As the UK population faces increased life expectancy the basic state pension will provide no more than a safety net.

At current prices (2011/12) the basic state pension is worth £102.15 per week for a single person.  How does that compare to you current income?  What plans do you have for your retirement and more importantly, how are you going to pay for them?

How much can I pay into a Pension?

Annual contribution limits

This tax year (2011/12), the maximum amount you can invest into your pension, personal or occupational, is 100% of your income or £50,000, whichever is the lower.

For these purposes, income is defined as your UK derived taxable earnings, including salary, dividends, interest and trading income.

You will receive tax relief on the entire investment, up to that limit. However, if you try to invest more than £50,000, you will have to pay tax at 40% on the excess.

This limit, incidentally, applies to the combination of both employee and, if applicable, your employer’s contributions. You can, however, carry forward up to three years unused allowance to subsequent tax years.

Tax benefits

The rules on pensions can change with the seasons, but some basic things have remained constant in recent years:

Investors get income tax relief on their contributions into a pension scheme (up to certain limits)
 
The income and gains made by that fund roll-up free of additional tax whilst the money remains invested.

At retirement, you can take a tax-free lump sum of up to 25% of the total fund value;

The remainder of the fund is then used to provide an income which will be taxable at your marginal income tax rate.

Lifetime allowance

The lifetime allowance applies to the total value of all private and work pensions (not state pensions) that you build up over your lifetime, including the investment growth you achieve. For 2011/12, this value is £1.5 million.

If your pension fund grows above this value then you will be liable to tax charges on the excess. And these charges are quite onerous - 55% if the amount over the lifetime allowance is paid back to you as a lump sum and 25% if the amount over the lifetime allowance is taken as some form of income.

If you have a large pension fund already, for example, if your pension fund is valued at £1.4m and you have 10 years still to go, it might be time to stop making contributions and find somewhere else to put your savings.

There was an allowance for people previously paying in more than £50,000 a year. Please ask for details of the Annual Allowance Charge if you think this affects you.

Personal or company based scheme?

Pension schemes are split between those for individuals – personal pensions, including SIPPS and QROPS and those administered by companies on behalf of their employees.

The pensions market is complex and the consequences of a wrong decision could mean you don’t have enough income to enjoy life to the full when you are older.  Take action now by seeking professional advice to ensure you make the best possible choices for you.

Employers, take the headache out of your group personal pension plans.  Ask to speak with our experienced corporate financial services team today by calling 0141 764 0040.

 

Personal Pensions Corporate Financial Services SIPPS QROPS

Information on this website should not be considered as personal advice, if you wish to receive professional advice as to the suitability of a Pension for you, please contact us. Contact us » for more information.