There are many concerns about the present pension situation and the potential lack of provision in the future due to an ageing population, the ‘demographic time bomb’. It is vital that people are thinking about their finances in retirement long before they are at retirement age and saving money for their pension.
- The state pension system in the UK is not on a "funded" basis i.e. the National Insurance contributions you pay are not savings for your retirement but used to provide pensions for people who are presently retired.
- There are more and more people over retirement age and therefore a greater amount of pensions will have to be provided by people who are still working. This problem is set to get worse in the future leading to a potentially serious shortfall in pension provision.
- In response to this growing problem, the government is encouraging people to make more provision for their own pensions, either privately or through employers' schemes. This includes the ‘A-Day reforms which came into force in April 2006 which changed the rules governing pension saving.
- You can contribute to private pension schemes and get tax relief on all the contributions you make up to £215,000 which for most people means you can put your entire salary into your pension if you wish.
- You are also allowed to save in more than one pension scheme at a time (a private pension and an employer scheme for example) and if you are a basic-rate tax payer then for every £1 which you save in a pension the government will add 28p.
- Stakeholder pensions. You may contribute up to £3,600 per year, and the pension company will claim back the tax relief from the government.
Personal pension schemes. This is a pension plan independent of the employer's pension plan and is usually taken up by people who are:
- self-employed, or
- employees of a company which does not have its own scheme.
- The benefits from stakeholder and personal pension schemes may only be paid as a pension, starting from any age between 50 and 75. From 2010 savers will not be able to take their pension before 55 unless they retire early due to poor health. You can also withdraw up to 25% of your pension fund as a tax-free lump sum.
- The basic form of providing a pension is by converting your fund into an annuity (annual income from investment) receivable for the rest of your life. It is best to contact the pension company to find out about ways to receive your annuity.
- It is also possible to draw direct from your pension without an annuity although any money not used to buy an annuity will be subject to inheritance tax.
Most employers offer some sort of pension scheme. These can be:
- "final salary" schemes - benefits related to salary at the date of retirement.
- "money purchase" schemes - contributions are paid into a fund which provides the pension at retirement age.
- Most employers' schemes are contributory — i.e. the employer pays into the scheme — usually by matching employees' contributions, up to a certain limit (e.g. 5% of basic salary).
- Employers' schemes will also usually provide for a tax free lump sum on retirement, and death in service benefits.
- It is also now possible to keep working whilst drawing on an occupational pension.
State second pension (known as S2P)
This scheme is the successor to SERPS (State Earnings Related Pension Scheme). Under that scheme, part of the National Insurance contribution (which was earnings-related) provided an additional amount added to the basic rate of state pension. Under this new scheme, employees may give up their right to the state second pension (known as contracting out) and instead receive a National Insurance rebate, which can only be paid directly into a personal pension scheme. Contracting out is not irrevocable, and you may contract back in to the scheme.
The pension service which is part of the Department for Work and Pensions provides more information about pensions
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