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What are the Different Types of Company Pension?

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Although company pension schemes may sometimes vary from company to company, it still typically categorized into two general types. These two types are final salary and money purchase scheme.

In a final salary scheme, the amount of pension fund will be based on two factors: the amount of your salary and the number of years you have been under the scheme.

In some instances under this scheme, you may only take your benefits until you reach 65, but some earlier. Also under circumstances, you may be given the option to take part of your pension as a tax-free lump sum and will receive smaller monthly income.

While in money purchase scheme, your pension will be based on how much you (the employee) and your employee have contributed and the interest that contribution has produced. The fund that this contribution has produced will be used at your retirement to provide your pension, commonly purchasing a regular income or what is called an annuity.

But at some instances, you can have the choice of taking part of your pension as tax-free lump sum, and the remainder will be used to buy annuity.

Note that how much will the fund will provide is computed using an annuity rate. This rate is dependent on factors like gender, age and interest rate at that time.

Standards for Stakeholder Pension

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Although it is a type of personal pension, a stakeholder pension is much different from other of its type. It needs to meet some necessary minimum standards in accordance to the law. These are to make sure that they offer flexibility, security, and value to your money.

And the following standards that a stakeholder pension should meet are firstly, Flexibility. It should be flexible enough that you:

  • Can change, stop or re-start your payments whenever you desire. And there should be no penalty if you do so.
  • Can start payments for as low as £20. And these could be given even at less regular intervals, not just weekly, monthly, etc.
  • Can switch to different providers without being charge of any when doing so.

Next is Security. It should be secured enough that it is managed by an approved stakeholder manager or trustees. They have the responsibility to ensure that the said scheme has accomplished all necessary legal requirements.

And lastly is Limit on annual management charges. It should be that for the first ten years that you hold the scheme, managers should charge fees of up to one and a half per cent of your pension fund. And for the following years, it should be up to one per cent.

Why Do You Need A Pension?

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Most people think that retirement is as easy as submitting your paperwork and waiting for their pension to arrive. Unfortunately, in a time of economic instability, relying on company pension may not be enough. Hence, it is important that you take steps in securing your future by getting pension advice.

If you are looking forward to an abundant lifestyle when you retire, then you have to start saving for a personal pension as soon as possible. This is especially important if you do not have access to a company pension and have no other means of saving for the future. Also, the SIPP Pension plan offers a tax efficient way of investing. An SIPP pension allows you to invest in a range of funds and it allows you to stop, start or change your contributions anytime you want to.

In order to make personal pension plans to work for you, you have to maintain a sense of balance. If you are earning a small wage and is trying to scrape by, then don’t put in a huge slice of you income to your pension because this means you won’t have enough money to spend for your daily needs. But if you can afford to start saving, then you should especially since most companies allow contributions as low as £25 as well as allow you to take payment breaks without penalties.

Tax Breaks to boost your Pension

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Pensions offer a unique combination of tax breaks.

These pension tax breaks can significantly enhance the value of your retirement fund, so it is important to make the most of them.

TAX BREAK 1
Tax relief on contributions: eligible pension contributions automatically receive basic-rate tax relief (up to certain limits). This means that if you pay £8,000 into your pension, the government adds £2,000 more. Higher-rate taxpayers can claim further tax relief through the annual self-assessment return. On £10,000 a higher-rate taxpayer could claim £2,000, so their contribution costs just £6,000. However, special rules apply for people with income of £150,000 or more.

TAX BREAK 2
Tax-efficient growth: assets invested in pension funds can grow free of UK capital gains tax (CGT) and income tax, although tax deducted from dividends’ cannot be reclaimed.

TAX BREAK 3
Tax-free lump sum: when you come to take benefits from your pension, you can take up to 25% of your total fund as a tax-free cash sum to spend or invest as you wish. The remainder will be used to generate an income. You will have to pay tax on this income.

Please note that if you reinvest the tax-free cash into a personal pension, there may be a tax charge, subject to certain criteria. Any statements on tax are based on our understanding of current law and practice, which could change in the future. The value of tax benefits will depend on your individual circumstances.

Company Pension Advice

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If you are looking for advice on Company Pension Schemes and need to see a specialist independent financial adviser, then we can help. Company Pension Scheme advice available nationwide

Our advisers understand the legal requirements you need to meet as an employer and can help you fulfil your obligations in as simple a way as possible.

As an employer you may have to provide your staff with access to a stakeholder scheme and you should enquire if this is the case.

Access requires that the company should consult with its employees on the choice of a suitable stakeholder scheme provider and then notify all eligible employees of its final selection.

The company does not have to contribute to the scheme but it has to provide a facility whereby contributions will be deducted from your pay and passed over to the scheme.

Employer Exemption
All employers must provide access to a stakeholder pension scheme unless they are exempt. The conditions for being exempt are as follows:

  • There are fewer than 5 people employed. All employees count for this purpose, including part-time and non permanent workers.
  • The company offers all employees access to an occupational scheme that they can join within one year of starting work.
  • The company operates a personal pension scheme that meets the following conditions:
    • it is open to all employees except those who are defined as ‘non-relevant’ (this term is explained below)
    • the company contributes at least 3% of basic salary to the personal pension
    • the scheme has no penalties for members who stop contributing or who transfer out to a different scheme
    • the company deducts the employee’s payments and sends them to the scheme if requested to do so.
  • The company has an occupational scheme which is only open to some employees but the rest have access to a personal pension scheme which meets the above conditions.

‘Non-Relevant’ Employees
There are employees to which an employer need not provide access to a stakeholder scheme if he so chooses. These are known as ‘Non-Relevant’ employees who are anyone:

  • whose earnings have fallen below the National Insurance lower earnings limit for at least one week in the last three months;
  • who has worked for the company for less than three months;
  • who is a member of the company’s pension scheme;
  • who is not in the company scheme but was free to join it and declined the offer or opted out;
  • who is excluded by the rules from joining the scheme because they are under 18 or are within 5 years of the scheme’s normal retirement age;
  • who is debarred from joining a stakeholder scheme because of HMRC restrictions (eg the employee does not normally live in the UK).

Call us on 0800 043 6701 or email admin@retirementsolutions.co.uk

Pensions Advice

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Here Is Some Simple But Effective Pensions Advice For Women

Women certainly can do with some useful pensions advice, especially as they tend to outlive their male counterparts by several years. The unfortunate part is that women that live longer than men seldom pay enough attention to properly preparing themselves for the extra years and so often end up struggling through their retirement years. The truth of the fact is that merely an approximate thirty five percent women save for their retirement. Those that do save will mostly be using their work or even some other personal savings plan to take care of themselves after retiring.

One reason why women will benefit from taking some pensions advice is that they tend to spend their income on children instead of on saving for retirement. There are fortunately a few tips and advice available to show every woman how they can save and live a happy and satisfying retired life.

The first piece of advice that every woman should pay heed to is that it pays to join their employers pension plan which is a tip that almost every financial planner offers to their female clients. According to existing laws, any employer that pays five or more employees to work for them must provide their employees with a low cost stakeholder pension. In case your employer pays and contributes to the company plan, it makes sense for you, a woman employee to also join in this scheme.

However, if the employer does not contribute then joining the scheme will not be quite as effective in which case it is better to seek advice and then join an individual stakeholder pension plan of your own choosing.

A second piece of pensions advice for self employed women in particular is to save their money via a personal pension such as a stakeholder plan that is a good example of a personal pension plan.

Thirdly, you can also despite whatever reservations you may have about the pension schemes on offer today, choose to plan for your retirement in a more novel and unique manner. Investing in property is a solution that has been tried by many women and with good results. If you do not wish to rely solely on a pension then you can save up your money and use whatever bonuses come your way to pay for a flat or home.

You should however understand that pensions are a way of savings and at the same time they allow you to also enjoy tax benefits. In addition to pension schemes you can also consider putting your money into tax savers which can offer you an alternate way of saving your money. Furthermore, women that are still in their fifties or who are younger will do well to start thinking about saving into pension because this is a good way of enjoying better tax breaks which will then boost their contributions.

For more details about proper pensions advice you should check out government websites as well as consult a financial planner or advisor who will show you what the best means of investing your money is. Diversifying your investments across different products including pensions can help you live a better and more comfortable retired life.

Pension Protection Fund

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The Pension Protection Fund was set up to to provide compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the Pension Protection Fund level of compensation.

The Pension Protection Fund is a statutory fund run by the Board of the Pension Protection Fund, a statutory corporation established under the provisions of the Pensions Act 2004.

To help fund the Pension Protection Fund, compulsory annual levies are charged on all eligible schemes.

Investing the assets of the Pension Protection Fund effectively is a further key function of the organisation.

The Pension Protection Fund is also responsible for the Fraud Compensation Fund – a fund that will provide compensation to occupational pension schemes that suffer a loss that can be attributable to dishonesty.

Company Pension Schemes

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Types of Company Pension Plan

Although these vary from company to company there are two general types of company pension:
Salary Related Pension Scheme
This is based on the amount of wage you receive and the number of years you have been in the scheme.
Money Purchase Scheme
This is based on how much has been paid into the scheme and how well the money in the scheme has been invested. On retirement the fund is used to buy an annuity which is a regular income for life.

Company Pension Schemes can be funded or non-funded. Non-funded simply means that you don’t pay into the scheme, the company pays your pension contributions for you. The company do achieve tax relief on these payments, and they often use these schemes as a way of attracting employees to their company.

Access to Company Schemes

Since October 2001, it has been compulsory for certain employers to offer eligible employees access to a stakeholder pension scheme.

Access requires the employer to consult with its employees on the choice of a suitable stakeholder scheme provider and then notify all eligible employees of its final selection.

The employer does not have to contribute to the scheme but it has to provide a facility whereby the employee’s contributions will be deducted from pay and passed over to the scheme. If the employee does not want to take advantage of this facility, they should be able to pay by direct debit.

For advice on company pensions or pensions in general call 0800 043 6701

Personal Pensions and Flexibility

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Defaqto says advisers’ clients are increasingly looking at more flexible savings and investment vehicles, such as SIPPs and ISAs, while traditional personal pension products see their popularity wane.

A survey of 500 IFAs found just 37% felt pre-retirement savings were the products they advise on the most, down from 52% in 2008.

A far greater number were giving equal weight to post-retirement income products, up 45% from 33%, while 18% were now biased towards these products, up from 16%.

Defaqto says poor economic conditions and changing demographics have caused a decline in popularity for retirement savings. The increasing attractiveness of ISAs has also provided considerable competition to the traditional personal pension, it adds.

Personal pensions remain the top retirement planning product recommended by advisers, though its place is slipping, with 67% of advisers saying it was an important area in 2009, down from 72% a year ago.

Pensions Lifetime Limit

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There is a limit on the total value of funds or benefits at retirement from all pension sources called the lifetime allowance, each individual has a maximum permitted tax-exempt fund which is £1.5 million for the 2006/07 tax year, this will increase on a fixed scale as follows for the next 4 years:

2007/08                      £1.6   million

2008/09                      £1.65 million

2009/10                      £1.75 million

2010/11                      £1.8   million

The limits ongoing will be set by the Treasury for the next 5 years but the limits will never decrease.

Pensions in payment, for example income drawdown are converted to a fund value.  The individual’s pension in payment is multiplied by a factor of 25 to determine the fund value to be used.

The value of these benefits are tested against the lifetime allowance when a ‘benefit crystallisation event’ (BCE) occurs, for example becoming entitled to a lump sum or a pension income.

The value of the fund that exceeds the Lifetime Allowance is subject to a tax charge.

* 55% if the excess is drawn as a lump sum
* 25% if the excess is used to provide additional retirement income

The fund will be subject to a second lifetime allowance test at age 75.  This will be based on the growth in the fund between the value at the first BCE (after any tax free cash has been taken) and the fund value at the time of the test.

There are transitional rules that apply to benefits accrued pre ‘A’ Day, 6 April 2006 that are in excess of the Lifetime Allowance, either at ‘A’ Day or in the future, to protect the fund value.

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