Pensions

Pensions

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A pension is a way of guaranteeing income once you have retired, in addition to the state benefit and private schemes which both provide limited financial support for your old age. In order to have a reasonable standard of living, a pension is a must therefore setting one up is extremely important.

Deciding which type of pension will provide you with the best income once you retire can be tricky, however pensions specialists such as Simple Financial Solutions can present you with the options and help you to plan for your post-employment years.

In addition to the State Second Pension, there are a number of other types of schemes such as occupational pensions, personal pensions and stakeholder pensions.

Pension schemes in brief;

  • Basic State Pension: Most people are entitled to this however the amount will depend on your national insurance contributions over the years.
  • State Second Pension: This replaced the State Earnings Related Pension Scheme (SERPS) in 2002. Unlike the basic state pension, it is based on a proportion of earnings during your working life.
  • Personal and Stakeholder Pensions: These were introduced in 1988 and were originally intended for people who worked for a company with no pension scheme. Since 2001, an employee can have both a company pension scheme and a personal pension.
  • Occupational Pension Schemes: These are set up and run by companies for their employees. They exist in both the public and private sectors and can feature final salary schemes, contributions from both employers and individuals and money purchase schemes.
  • Additional Voluntary Contributions (AVCs): By law, employees must now have the opportunity to make additional contributions to their occupational scheme in order to enhance their finance package after their retirement.
  • Free Standing Additional Voluntary Contributions (FSAVCs): Introduced in 1987, these tend to offer a wider choice of investment and are run by a pension provider rather than the trustees of the employee’s pension scheme.
  • Self-Invested Personal Pension Schemes (SIPPS): This is a product of the Government’s 2006 proposals to simplify saving for retirement, offering greater flexibility and ways of generating an income.
  • State Earnings Related Pension Scheme (SERPS): Only those employed between 1978 and April 2002 are entitled to this scheme (except the self-employed) which was replaced by SERPS in 2002.

What happens when you retire?

The money built up in your pension fund is used, once you retire, to buy an annuity or similar which provides you with your post-employment income. Your pension income will be taxed as earned income. However, as tax rules are subject to change, the value of your pension fund can go down as well as up so it may well be worth less than has been invested.

If you retire early your pension fund will obviously be less than it could have been and you’ll have a longer period to stretch it over. Each company pension is different so you’ll need to check whether you can retire early and take out your pension or not. Personal or stakeholder pension holders can retire no earlier than 55.

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