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Why save for retirement?

A retired person could be spending more than 30 years in retirement. It is vital to make plans to save into a pension.

State Pensions

The current full weekly allowance for a single person is £97.65 and £156.15 a week for a couple. This adds up to around £450 for an individual.

Qualification depends on how much National Insurance (NI) you’ve paid during your working life. Women working for 44 years will need 39 qualifying years of making NI contributions for a full state pension. For men with a working life of 49 years will need 44 qualifying years.

From 2010 the number of years of NI contributions that need to be paid to gain a full state pension will be cut to 30, for both men and women.

The government is increasing the state pension age so people will have to work longer before they get their state pension.

Employer pensions

Schemes provided by employers are becoming less generous. Final salary pension scheme (also known as a defined benefit scheme) from the companies where they worked are disappearing. Regulation, volatility in investment markets and longevity increases have made it difficult for employers to continue offering these schemes.

The pension income paid by a final salary scheme is calculated as a percentage of your salary multiplied by your years of qualifying service. These pension schemes are rapidly closing to new members, to be replaced by defined contribution pension scheme (also known as a money purchase scheme). These schemes place the responsibility on the individual, and possibly the employer, to pay contributions into the scheme. The final pension depends on contributions and performance and is therefore uncertain and needs regular reviews.

Personal Pensions

An individual receives relief at their marginal income tax rate on their pension savings. Although there are no limits to how much can be saved in registered pension schemes, the maximum tax relief available in any one year for pension savings is limited to 100 per cent of a person’s earnings and by what is called the annual allowance. The annual allowance for the 2010-11 tax year will be £255,000. .

The Government has announced it will restrict, to the basic rate of income tax, tax relief on pension savings with effect from 6th April 2011 for people with taxable income of £150,000 or more. There a number of measures in place to avoid high earners making large pension contributions before the start of the 2011 tax year.

A straightforward personal pension plan is a “stakeholder” personal pension plan which is a type of low-charge pension in which you can save from as little as £20.

Or you could choose a personal pension which often offers a wider investment choice. Personal pension plans often have higher minimum contributions and the charges can be higher too.

Self-invested personal pensions (SIPPs) are another type of personal pension plan which are for more sophisticated pension investors as there are very few restrictions on what can be invested in. SIPPs can have high fees because of the width of the investment choices.

Contributions

Personal pension accounts

The earlier an individual starts to save the better, rather than delaying to a certain age to achieve a sizeable pension.

It is important to strike the right balance between short, medium and long term savings. An Independent Financial Adviser will be able to help pinpoint how much to save without leaving a shortage in the meantime.

Pension Simplification

From 6th April 2006, so-called “A-Day”, the government brought in a new simplified set of rules, effectively shelving the previous tax regimes for pensions.

All policy holders can take 25% of the value of the fund as a tax-free lump sum, when they come to take benefits. .

Individuals and employers will be able to pay up to one annual allowance into your pension. This amount is up to 100% of your earnings and for tax year 2010/11 is capped at £255,000, with the limit set at £3,600 for low or non-earners paying into personal and stakeholder pensions. The government encourages people to save more by being able to save into a number of different pensions at the same time under the new rules.

There is a limit on your entire pension savings, including any private pensions, occupational pensions and free-standing additional voluntary contributions. In the tax year 2010/2011 this amount is £1.80m, with the threshold expected to rise over the years to allow for the impact of inflation.

If the£1.80m is exceeded there is a lifetime allowance charge, or recovery tax, which will be charged at up to 55% of the excess.

The changing pension world
The Pensions Act 2007 affects individuals reaching pension age on or after 6 April 2010. Currently basic state pension is paid to women at age 60 and men at 65. From 6 April 2020, the state pension age for both men and women will be 65. In 2024, it will rise to 66, in 2034 it will be 67 and then in 2044 it will reach 68. Those born before 6 April 1950 will not be affected.

People are living longer, the government is having to support more pensioners from the age of 65. However, the number of years’ national insurance contributions people will need to achieve a full basic state pension has as of this year been reduced to 30, for both men and women, from 2010. Another change is a plan to re-link the state pension with earnings, rather than inflation, in 2012. Another change for state pensions is the move of the state second pension to a simple flat rate

Personal Accounts – from 2012
From 2012 a new type of pension is planned, personal accounts. All employees aged 22 and over and earning more than £5,000 per year, who aren’t offered access to an employer pension arrangement, will be auto-enrolled into personal accounts in 2012, although individuals can opt out. Those nor opting out will automatically join the scheme and pay 4% of salary into it. The employer will contribute 3% of your earnings, and an extra 1% from tax relief will be added in making a total of 8%

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