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With the basic state pensions for a married couple set at just £145.05 a week for 2008/9, someone earning £40,000 faces a drop in income of more than 80%* if they do not have any additional provision, such as a personal or occupational pension.
This makes personal pension planning essential for just about everyone.
* Most people will also be entitled to some form of Second State Pension.
What you can save
Fortunately, new rules introduced in April 2006 mean that almost anybody in the UK can invest up to £2,880 a year into a pension plan and have it ‘topped up’ to £3,600 a year by the government.
What is more, you can make additional pension contributions up to your entire earnings from trade profession or employment, provided you do not exceed the annual allowance, which is set at a generous £235,000 for 2008/9 and increases thereafter.
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In fact if you have an employer, they can put in up to the annual allowance (less any contributions you may make) even if this is more than your earnings (subject to satisfying HM Revenue and Customs that your total remuneration package is justified).
How you can benefit
When you come to retire, your fund (which should not exceed the lifetime allowance, set at £1.65 million for 2008/9 and rising thereafter, or a tax charge will normally apply) can be used to:
- Provide a pension commencement lump sum of up to 25% of your fund (currently tax free);
The balance used to:
- Purchase an annuity from an insurance company (not necessarily the one you built up your fund with); or
- Draw an income directly from the fund of anything from £0 to 120% of the annuity available to a person of the same sex and age (called an unsecured pension) up to age 74; and then
- Draw an income directly from the fund of anything from 55% to 90% of the annuity for a 75-year-old of the same sex, from age 75 (called an alternatively secured pension) based on the value of your fund at the time.
You can switch from an unsecured pension or alternatively secured pension to an annuity at any time.
Benefits may be taken from age 50, although this rises to age 55 in April 2010, and any pension commencement lump sum must be taken before age 75, or it is lost.
If you die …
… before benefits are taken, the entire fund can be returned to your estate, paid to a nominated beneficiary or used to provide benefits for a dependant.
… after benefits have started to be drawn as an annuity, the income can continue if you have asked for a joint life or capital protected income, otherwise it is lost.
… after an income has started to be drawn directly from the fund, any remaining monies can be used to provide a dependant’s income, or the fund returned to your estate or paid to beneficiaries as a lump sum less 35% tax.
… after you reach 75 and are still drawing an alternatively secured income, more than 82% of the fund will be taken as tax, unless you leave the money to a charity, or political party.
The value of investments is not guaranteed and will fluctuate. You may get back less than you invest.
Self invested pensions
We can advise on all aspects of self invested pensions including Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs).
For more details, please contact us.
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