This guide is supplied for general information only. You should
seek specific advice for your individual circumstances before acting on any of
the information outlined below.
Personal Pension |
Stakeholder Pension |
Self Invested Personal Pension |
Small Self Administered Schemes |
Occupational Pensions |
Most people recognise that it is wise to plan for their retirement. This is
especially true for those who are hoping to retire before the usual state
retirement ages. Putting aside a regular amount of money during your working
life is probably the best method to ensure that you will have sufficient income
during your retirement.
Under current legislation the annual allowance for pension contributions is
limited to the greater of £3,600 or 100% of earnings (capped at £50,000 for tax
year 2012/13 to qualify for tax relief). If this figure is exceeded a tax charge
of 40% or 50% will be applied. There is also a lifetime allowance which at
£1.50m is currently the maximum your fund is
allowed to grow to subject to review. Again if this is exceeded a
tax charge of 55% will be applied to the excess if drawn as a lump sum or a 25%
tax charge if drawn as an income upon retirement in addition to income tax.
There are a number of different retirement planning options available from
Stakeholder Pensions to Self Investment Personal Pensions and it is important
that you seek independent financial advice to find out what type of plan best
suits your personal circumstances, attitude to risk and demands and needs.
The levels, basis and reliefs may be subject to change and are based on
current legislation which may change in the future. It is important you review
your retirement provision on a regular basis to ensure your contract suits any
changes in your circumstances and legislation.
Some of the Retirement Options available are:-
Personal Pension (PPP)
A Personal Pension
Plan is an investment policy for retirement designed to offer a lump sum and
income in retirement. It is available to any UK resident who is under 75 years
of age. Personal Pension Plans are money purchase arrangements. This means
that an individual contributes to the plan, the money is invested and a fund is
built up. The amount of pension payable when the individual retires is dependent
upon the amount of money paid into the plan, how well the investment funds
perform and the 'annuity rate' at the date of retirement. A feature of this type
of pension is that you do not have to be in employment to take one out and you
can provide a pension for your spouse/partner or your children.
A Stakeholder Pension
is a type of Personal Pension Plan (PPP). In other words, it is a money purchase
arrangement designed to provide a lump sum and income in retirement. Like a PPP,
it is available to any UK resident under the age of 75. A major feature of
this type of pension is that you do not have to be in employment to take one out
and you can provide a Stakeholder Pension for your spouse/partner or your
A Stakeholder Pension has been designed to incorporate a set of minimum
standards laid down by the Government. Unlike many personal pensions,
there can be no penalties on stopping contributions to an individual's fund or
on transferring the benefits to another plan and at retirement the option
exists to take a quarter of the fund as a tax-free amount.
Stakeholder charges are capped at a maximum of 1.5%, reducing to a maximum of
1% after the first 10 years. There are various methods by which you could build
up a capital sum in order to provide an income in retirement. Stakeholder
Pension Plan has relatively low charges as well as the standard tax
Self Invested Personal Pension (SIPP)
Self Invested Personal Pension (SIPP) is similar in many ways to a normal
Personal Pension Plan. They come under the same basic rules as far as
contributions, tax relief, eligibility etc are concerned. However the
difference arises out of what the investments underlying the arrangement can
A SIPP allows the planholder additional freedom in what to invest in and for
the plan to hold these investments directly. The planholder can have
control over the investment strategy or can appoint a fund manager or
stockbroker to manage the investments.
For Sipp contracts written under trust, the trustee controls the investment
under instruction from the individual. It is possible for the planholder
to be the trustee. If this is the case, an approved administrator must be
appointed to carry out investment transactions.
The charges levied on a SIPP are numerous, vary from provider to provider and
can really be quite substantial. Hence it is very important that a
potential investor knows what they are getting themselves into before committing
to such an investment.
PLEASE TAKE PROFESSIONAL ADVICE. Running your own investment
portfolio can sound attractive but it requires skill, experience, access to up
to date information and technology and time.
Small Self Administered Schemes
This is a trust based scheme and as such will need
trustees, or a corporate body acting as trustee plus an Administrator and an
Actuary. The structure can vary to suit the individual needs of the company or
directors who wish to have the SSAS set up.
SSASs can take the form of a relatively simple arrangement normally effected
through an insurance company. This type of SSAS is commonly set up when there is
no immediate requirement to buy a property and the contributions each year
are relatively modest. A more complex arrangement can be set up to suit specific
pension schemes are pension arrangements that are set up by employers to provide
income in retirement for their employees. Although the employer is responsible
for sponsoring the scheme, it is actually run by a board of trustees - with the
exception of most public sector schemes. It is this board of trustees that is
responsible for ensuring payment of benefits. There are two different
types of occupational pension scheme - money purchase and final salary.
1. Final Salary schemes are
sometimes known as defined benefit or salary related schemes. Individuals
contribute to the scheme with the promise of a certain level of pension. The
amount of pension payable from such a scheme is dependent upon:
- the length of time served in the scheme (known as pensionable service)
- earnings prior to retirement (known as final pensionable salary)
- the scheme's 'accrual rate'. The accrual rate is the proportion of salary
that is received for each year of service. So, if the scheme has an accrual
rate of 60, the individual will receive 1/60ths of his/her final pensionable
salary for each year of service completed.
2. Money Purchase schemes are
sometimes referred to as defined contribution schemes. Employers and employees
contribute to the scheme where the money is invested and built up for each
scheme member, into a 'pot of money'. The amount of pension payable from this
scheme is dependent upon:
- the amount of money paid into the scheme (by the member and the employer)
- how well the investment funds perform
- the 'annuity rate' at the date of retirement. An annuity rate is the
factor used to convert the 'pot of money' into a pension.
A person who is an
individual member/planholder of a money purchase arrangement (i.e. an
occupational money purchase scheme, a personal pension, stakeholder pension,
SSAS, SIPP etc) builds up a 'pot of money'. On retirement, the individual
usually uses all or part of the pot to buy an annuity.
An annuity is a contract between an insurance company and an individual
pension plan owner under which the individual hands over all or part of their
pension fund to the insurance company which agrees to pay out an income to the
individual for the remainder of their life. The annuity would normally be paid
monthly, quarterly, half-yearly or annually.
The value of the annuity is dependent on two factors – the size of the pot
and the annuity rate offered by the insurance company selling the annuity. The
annuity rate is basically the factor used to convert the accumulated fund into
Enhanced annuities are available to those who have a shortened life
expectancy due to poor health. These are also known as impaired life
The FSA have produced a guide to Annuities and Pension Fund Withdrawal,
commonly known as pension drawdown (a way of accessing your pension prior to
purchasing an annuity which gives you flexibility of income and allows you to
take the benefits without being tied into an annuity whilst continuing to invest
in the markets) which can be viewed at
For further information, please
contact Equus IFM Ltd