Pensions Guide

Retirement may feel like too far away to think about. But the earlier you start saving for your retirement, the more money you're likely to have to enjoy yourself – and pay the bills – when you retire.

So how much will I need when I retire?
Everyone’s situation is different, and everyone has different needs. Some living costs may be lower when you retire, such as taxes, not having to travel to work or pay National Insurance contributions. You may have paid off your mortgage and you may no longer have to support a family. On the other hand, you will have more leisure time, and other costs, such as heating and health care, may increase.

Where will I get money from when I retire?
The State Pension aims to provide people with a basic income when they retire, but depending on the kind of lifestyle they want during retirement, this may not be enough.

A pension is a way to have a regular income to live on when you retire. It is one of the most effective ways to save money for your retirement because you can get tax relief on the money you pay into a pension scheme.

There are a number of different types of pension:

• the State Pension – this is made up of the basic State Pension and the additional State Pension, and
• Private Pensions – these include occupational pensions (sometimes called 'work' or 'company' pensions) and personal pensions (including stakeholder pensions).

Please note tax reliefs referred to are those applying under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.

The State Pension is made up of:

• the basic State Pension, and
• the additional State Pension.

You may get one or both of them when you reach State Pension age.

To get them, you need to have paid, been treated as having paid, or been credited with paying, certain money, like National Insurance contributions, over a period of time.

Most employers will take your National Insurance contributions straight out of your wages. You can see how much you're paying on your pay slip. Your employer also pays National Insurance contributions for you. If you are self-employed, it is your responsibility to make sure you pay your own National Insurance contributions.

Although the State Pension may give you a basic income, you need to think about other savings, too, so that you can have the lifestyle you want when you retire.

What is State Pension age?
The date you reach State Pension age depends on when you were born. From 2024, the State Pension age for both men and women increases by one year in every decade to reach 68 in 2046.
This change will affect anyone born on or after 6 April 1959.

How is my basic State Pension worked out?
People get different amounts of State Pension. This depends on how many years they have paid, or been treated as having paid, or been credited with National Insurance contributions. These are known as 'qualifying years'.

How much do you get?
If you decided to retire in the tax year 2008/09 and you qualified for a full basic State Pension based on your own National Insurance contributions, you would get £90.70 a week. But if you only qualified for the minimum basic State Pension (25% of the full amount), you would get £22.68 a week.

The additional State Pension is money paid to you by the Government each week. The amount you get depends on your earnings and National Insurance contributions paid during the whole of your working life. You do not have to be getting the basic State Pension to get additional State Pension.

Your additional State Pension is also called the State Second Pension.

How much do I get?
The amount of additional State Pension you will receive depends on your earnings. The more you were earning (up to the National Insurance 'upper earnings limit'), the more additional State Pension you will get.

However the rules for the additional State Pension are changing. In the future it will become a simple, single rate, weekly top-up to the basic State Pension (based on earnings between certain limits).

What if I want more money than my State Pension when I retire?
The State Pension will give you a basic income when you retire, but only you can decide the kind of lifestyle you want for your retirement, and what you need to do to achieve it.

There are ways to help you increase your income when you retire. For example you could

• make payments into a private pension (these include occupational, personal and stakeholder pensions)
• work for longer or
• put off receiving your State Pension.

Private pensions include occupational pensions (sometimes called 'work' or 'company' pensions) and personal pensions (including stakeholder pensions).

Let's firstly look at occupational pensions.

An occupational pension scheme is sometimes called a work or a company pension scheme.

It is an arrangement an employer makes to give their staff a pension when they retire.

If you don't join, you could miss out on tax relief on your contributions as well as your employer making payments towards your pension.

You can get an occupational pension on top of any State Pension you may be entitled to.

Types of occupational pensions
There are two main types of occupational pensions.

Both have trustees or scheme managers to look after the interests of their members.

1 Salary-related pension schemes
These are also called defined benefit schemes, DB schemes or superannuation schemes.

In a salary-related scheme, the pension you get is based mainly on the number of years you belong to the scheme and your earnings.

Your pension could be based on your earnings at the time when you retire or leave the scheme, or your average earnings during the time you paid into the scheme.

In some schemes only your basic salary counts towards your pension. But, some schemes also include other payments, such as overtime and bonuses.

You usually have to make payments into the scheme on top of those that your employer pays.

2 Money-purchase pension schemes
These are also known as defined contribution schemes or DC schemes.

In a money-purchase scheme, your contributions (and any contributions your employer makes) are invested in things like bonds, stocks and shares. The amount you get when you retire depends mainly on the total amount of money you and your employer have paid into the scheme, how well the investment has performed, and the age you decide to retire. Please remember the value of investments can go down as well as up and you may not get back the amount invested.

When you retire you may be able to take some of your pension fund (up to 25%) as a tax-free lump sum. You then use the rest of the fund to pay for your pension, or to buy an annuity from an insurance scheme either immediately or in the future. An annuity is a pension which is paid for the rest of your life.

This is why this type of occupational scheme is called a 'money-purchase scheme' – when you retire, you use the money in your fund to give you a regular income for the rest of your life.

What are the benefits of an occupational pension?
The following are the three important benefits of an occupational pension.

• You get tax relief on what you pay into an occupational pension.
  
  Payments you make into an occupation pension scheme are deducted from your gross pay meaning that you don’t pay tax or National Insurance on the amount you pay into the scheme.
  
  For example
  
  Anna pays £100 into her occupational pension scheme. The amount is deducted from her gross pay before tax or National Insurance. Assuming Anna was a basic rate tax payer the £100 would only be worth £69 if she had taken this as income.

• Your employer may make payments into your occupational pension. Most employers who run occupational pension schemes make contributions to the scheme on top of those you pay.


• You can get extra benefits. Occupational pension schemes often give benefits such as life assurance or, if you die, a pension for your dependants. You need to check with your pension scheme provider to see exactly what benefits you will get.

When would I get it?
This depends on the rules of the occupational scheme you belong to. You will usually be able to start claiming your pension and benefits at age 60 or at age 65. Ask your employer for details if you are not sure what the retirement age is for your scheme.

However, you don’t have to retire from all work to get an occupational pension – and in some cases you can even continue working for your employer.

How much do I pay?
The rules are different depending on which pension scheme you belong to. Usually, you pay a monthly contribution that is a percentage of your salary. You may also be able to make extra contributions if you want to increase the amount of your pension fund when you retire.

How much do I get?
The amount of pension you will get depends mainly on the type of scheme you belong to and how long you have paid into it.

In a salary-related pension scheme, the amount of pension you get is mainly based on the number of years you belong to the scheme, and what you earn.

In a money-purchase pension scheme, the amount of pension you get depends on how much money you and your employer have paid into your fund and how well the scheme’s investments have performed by the time you retire.

Every year, your employer or scheme may send you a statement of how much pension you might get when you retire. This will help you decide if you need to save more. If you do not get a statement every year, you can ask your employer or pension provider for one.

Things to remember when you join an occupational pension scheme

Before you join an occupational pension scheme, two of the most important things to check are how much you will have to pay, and what contributions your employer is going to make.

An occupational pension scheme is connected to your job. So, if you leave your job you need to check what will happen to your pension. You may be able to transfer your pension to another occupational scheme. It depends on whether or not your new employer will let you transfer your pension.

If you decide to keep your money and benefits in your previous employer’s occupational pension scheme, you can still join another occupational pension scheme.

No financial products, including pensions, are completely free from risk. For example, your employer may go out of business. Or, they may decide to change or close their occupational pension scheme for another reason, which could mean you get less than you expected. Also, the amount of pension you get may depend on how well the scheme has performed by the time you retire.

Do I still get the additional State Pension?
If your occupational pension scheme is contracted out, you will lose some or all of your additional State Pension.

What if my employer doesn’t offer an occupational pension scheme?
Most companies with more than five employees now have to offer you either an occupational pension scheme, or give you access to a stakeholder pension scheme. Or, you can choose to take out a personal pension.

What happens if my employer goes out of business or the occupational pension scheme ends (known as 'winding up') for some other reason?
If your employer goes out of business or your pension scheme winds up (for whatever reason), there is a chance that you may get less pension than you expect when you retire.

The Government has set up two organisations:

• the Pension Protection Fund, which may pay compensation to members of defined-benefit pension schemes if their employer goes out of business, and
• the Pensions Regulator which helps protect members of all work-based pension schemes.

However, if you think your pension scheme may wind up, it’s important to make sure you understand your choices and that you find out what is best for you to do, depending on your situation.

You can buy a personal pension from lots of pension providers such as banks, life assurance companies or building societies. A personal pension is completely personal to you, which means you can continue to pay into it if you change jobs.

Personal pensions are money-purchase schemes. These are also known as defined contribution schemes or DC schemes.

In a money-purchase scheme, your contributions (and any contributions your employer makes) are placed in investment funds that invest in things such as bonds or stocks and shares. Your adviser will help you choose funds that are most suitable for you or you can choose them yourself.

The amount you get when you retire depends mainly on the total amount of money you and your employer have paid into the scheme, how well the investment has performed, the product charges and the age you decide to retire. Please remember the value of investments can go down as well as up and you may not get back the amount invested.

When you retire you may be able to take some of your pension savings (up to 25%) as a tax-free lump sum. You can then either use the remaining fund you've built up to buy an annuity (a regular income payable for life) from a life insurance company, draw a taxable income directly from your pension fund, as an 'unsecured pension' before age 75 or draw a taxable income directly from your pension fund, as an 'alternatively secured pension' from age 75 (similar to income withdrawal but with lower withdrawal limits).

What are the benefits of a personal pension?
There are several benefits of paying into a personal pension scheme:

• you get tax relief on your contributions
• you can choose to take a tax-free lump sum of up to 25% of your total pension fund when you retire.
• you may be able to choose the funds you invest in, if you want to – this type of pension is called a Self Invested Personal Pension
• other people can pay into a personal pension for you (your partner or other members of your family can help you to save for your retirement), and
• you don't need to be working to save in a personal pension scheme.

When would I get it?
This depends on the rules of the scheme you belong to. You will usually be able to start claiming your pension and benefits from the age of 50. (But, by 2010, this will usually be from the age of 55.) But, the longer you continue to work and to pay into your scheme, the more money you are likely to get when you decide to retire. Most people choose to wait until they are 60 or 65. Remember, you don’t have to retire from work to get your pension benefits.

When do I make payments?
Usually, your pension provider will ask you to make regular, monthly payments into your personal pension. But some people, especially self-employed people, prefer to make contributions once a year.

How much do I get?
The amount of pension you get depends on how much money you have paid into your fund by the time you retire and how well the scheme has performed. Every year, your pension provider will send you a statement of how much your personal pension fund is likely to be worth. This will give you an idea of what you could expect to get when you retire, and will help you decide if you need to save more.

Things to remember when choosing a personal pension scheme
Choosing a personal pension scheme is an important decision and there are many things to consider, including the following:

• Before you decide to take out a personal pension, compare the costs you will have to pay against the costs of a stakeholder pension. Make sure the personal pension you choose is the right one for you, because you may have to pay extra charges if you decide to transfer to a different type of scheme later on.
• Find out what the rules are on making contributions. For example, can you increase or decrease the amount you pay if your situation changes?
• Find out how much you can save, and whether the pension scheme is contracted out of the additional State Pension.
• Find out how the pension provider will invest the money.
• Find out how much the pension provider will charge you for setting up your pension and for managing it. Remember, high costs don’t always mean it’s a better pension, as lower costs do not always mean better performance.
• Because of all these things, it’s a good idea to ask several pension providers for quotes and do some research. One place to start is the Financial Services Authority. The Financial Services Authority publishes lists of all the pension providers it approves, and it provides information to compare different pension schemes.
• You could also contact the Pensions Advisory Service for more information about personal pensions. Or, you could ask an Independent Financial Adviser to help you choose a suitable personal pension.

As with any other agreement you make about a contract, it is important to consider the advice you are given very carefully. Always read the small print before you sign or agree to anything.

Stakeholder pensions work in much the same way as other money purchase pensions. You pay money into your pension to build your pension fund. The managers of the scheme invest the fund on your behalf.

The value of your pension fund will then be based on how much you have contributed and how well the fund's investments have performed.

When you retire, you use the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company of your choice. Most people choose to wait until they are 60 or 65 until drawing on their stakeholder pension. However, if you wish you can draw on these benefits while still working.

What are the benefits of a stakeholder pension?
There are some differences between stakeholder pensions and other types of personal pensions.

Stakeholder pensions have to meet certain standards set by the Government:

• You get tax relief on your contributions.
• The charges are capped – this means there are upper limits to how much you have to pay the pension fund provider
• There are low minimum payments
• They are more flexible than many other private pension schemes – you can choose when to pay and how often and there are no penalties (for example, fines) if you miss a payment.
• Other people, as well as your employer, can pay into a stakeholder pension for you. This means that your partner or other members of your family can help you to save for your retirement.
• You don’t need to be working to save in a stakeholder pension scheme.

When do I get it?
As with other types of personal pensions, you will usually be able to start claiming your pension and benefits when you reach age 50. (By the year 2010 this will usually be age 55.)

But, the longer you continue to work and to pay into your scheme, the more money you are likely to get when you decide to retire. Most people choose to wait until they are 60 or 65.

Remember, you don't have to retire from work to get your pension benefits.

How much do I pay?
One of the advantages of stakeholder pensions is that you can choose how much you pay in – and you can make payments whenever you have some spare cash.

To get the most out of your pension, it is best to make regular payment if you can, but you can stop payments for a while if you need to and it won’t cost you anything.

You should remember that the less money you put into your pension scheme now, the less you will get back as income when you retire.

How much do I get?
This depends on how much you have paid into your stakeholder pension scheme, and how well the scheme has performed by the time you retire.

Your pension scheme provider will send you a pension statement every year. This will tell you how much your fund is worth and how much you might get when you retire, if you continue to contribute at your current level

Retirement may feel like too far away to think about. But the earlier you start saving for your retirement, the more money you’re likely to have to enjoy yourself – and pay the bills – when you retire.

Everyone's situation is different, and everyone has different needs. Some living costs may be lower when you retire, such as taxes, not having to travel to work or pay National Insurance contributions. You may have paid off your mortgage and you may no longer have to support a family. On the other hand, you will have more leisure time, and other costs, such as heating and health care, may increase.

Where will I get money from when I retire?
The State Pension aims to give people a basic income when they retire, but depending on the kind of lifestyle they want during retirement, this may not be enough.

To help you decide if you should start saving more for your retirement, you need to look at your finances in the following ways:

• find out how much State Pension you may get when you reach State Pension. This could help you decide whether you are saving enough money for your retirement, and if you need to save more.
• if you are a member of an occupational pension scheme your employer or pension provider may send you a pension statement every year. This shows how much you might expect from the scheme when you retire.
• if you are a member of a personal pension scheme your pension provider will send you a pension statement every year. This shows how much your personal pension fund could be worth when you retire. The actual final fund value however will depend on several factures including the performance of the fund.

Shortfall
If you don’t think you will have enough money to live on when you retire, think about whether you can afford to save more. You could:

• increase what you pay into an existing pension
• start another pension or
• look into other ways to save.

You may also plan to use other means to give you money to live on when you retire, for example, investing in property, investing in bonds, stocks and shares, or selling your business or your home. You need to find out how much these may be worth, or how much regular income you may get from these investments when you retire. You may also choose to stay in work longer. This can help you to build up a better income for your retirement as well as giving you more income now.

Everyone's situation is different. The amount of money you will need for retirement and the way in which you will find your retirement are unique to you.

For more information on Pensions, you can contact the Pensions Service.

No financial products, including pensions, are completely free from risk so you may want to speak to an Independent Financial Adviser for more information.

A pension aims to provide a regular income for you to live on when you retire

There are a number of different types of pensions including State and Private Pensions.

There are 2 State Pensions: the Basic and the Additional.

Private pensions include Occupational and Personal Pensions including Stakeholder and Self-Invested Personal Pensions also known as SIPPs.

A pension is designed to provide an income when you retire and you can get tax relief on the money you save in a private pension scheme - subject to certain limits set by the government.

Some private pensions will also pay a percentage of the total value of your pension fund as a tax-free lump sum when you retire.

The age at which you take your pension depends on the type of pension you have.

The amount you’ll receive when you retire is based on the amount you pay in over the years, how long you have pay in for, and how well the funds you invested in have performed. Some occupational pensions are based on your salary and length of service.

Although pension benefits may be paid to your beneficiaries after you die, the amount paid and how they are paid, will depend on the rules of your pension and whether you die before or after you retire. So, although your pension may provide an income to your dependants, it may not be the same as you would receive.

The length of your retirement could be around a third of your life so it is important to think about how you will pay your bills and have money for spending.

The State Pension will give you a start. However it may not be enough to live on, so many people are saving money in other ways to give them extra income when they retire.

With pensions there are many solutions and everyone's situation is different. If in doubt please speak to an Independent Financial Adviser.

Find out more about Pensions by visiting the Learning & Research pages on natweststockbrokers.com