Pension Planning
We regard pension schemes as investment plans with tax
relief that also impose restrictions on what can be done with capital
accumulated at retirement. There are, however, many forms of pension
scheme.
Occupational Pension Schemes
These are organised by employers for the benefit of
employees. Traditionally they have been linked to an employee’s
salary under that employment and years of service and been very secure. More
recently many employers have found this an expensive option and have
introduced defined contributions schemes that limit the employer’s
liability to the level of contribution they commit to contributing to
the scheme on behalf of employees.
Additional Voluntary Contributions (AVCs)
Employees who are members of occupational schemes may
choose to increase their pension provision by making contributions to
an AVC scheme. This can be linked to the main scheme or may be
free-standing in order that the employee can use a provider of their
choice rather than be limited to the provider selected by the trustees
of the occupational scheme. New regulations introduced in April
2006, that permit employees to contribute to a personal pension at the
same time as they are members of the occupational plan, may reduce the
attraction of AVCs.
Personal Pensions
Traditionally used by the self-employed or employees
who do not have an occupational pension scheme available, they
offer very flexible options. They are offered by a large number
of providers and it is possible to select a broad range of investment
options to suit the risk profile and term to retirement of each individual. At
retirement it is possible to withdraw 25% of the accumulated fund as
tax-free cash whilst the balance must be used to provide a lifetime income.
Stakeholder Pensions
This is a specific form of personal pension introduced
by the Welfare Reform and Pensions Act 1999 to ensure that all employees
have access to a pension scheme through their payroll with a limit
on maximum charges. Any employer with more than five employees
must offer access to a stakeholder pension and charges are limited to
a maximum of 1.5% a year. However the limit on charges may mean
a restricted choice of funds and reduced facilities.
Annuities
Income from a pension at retirement is frequently achieved
by purchasing an annuity. The accumulated fund, after withdrawal
of 25% as tax-free cash, is paid to an insurance company that guarantees
a set level of lifetime income. It is possible to include benefits
such as regular increases, a widow’s benefit, or guaranteed periods
of payment but additional benefits will reduce the income payable.
