The simplest way of increasing your pension is to start paying money into a personal pension, which is organized and invested by an insurance company; and, because you can get tax relief on what you pay at your highest rate of tax and your money is put into a tax-free fund, doing this may be the best way of saving for retirement. Since April 2001, you have been able to take out a personal stakeholder pension scheme. These are personal pensions which meet certain conditions on low cost and flexibility.
A personal pension will pay out an income; the size depends on how long and how much you have saved, although there are limits imposed on how much you can save. It also depends on how well the investments in the pension fund have done and the level of annuity rates when you retire. You can choose when you want to start receiving the benefits from the plan, but currently it must be somewhere between your fiftieth and seventy-fifth birthday.
TRADITIONAL PERSONAL PENSIONS
Personal pensions can be very flexible provided you choose the right plan. For example:
? you can invest a lump sum when you want or save on a regular basis
? you can alter the premium from time to time
? the pension you choose at the end does not have to be a level amount; the income can start off lower, but increase each year with inflation
? you can choose a smaller joint-life pension, which will be paid as long as either of two people is alive
? most plans offer an ‘open-market’ option, which allows you to shop around to see if you can use the sum of money you have built up with one company to get a higher pension from another company
? you can normally choose to take a lower amount of pension and have a tax-free lump sum as well
? you may be allowed to put off buying a pension (an ‘annuity’) at the time you retire and draw an income direct from your pension fund instead up to age 75. This is useful if annuity rates are poor at the time you retire, but it is an option only suitable for large pension funds of ?250,000 or more, say. This draw-down facility should be used with great care as using it could cut a great hole in your pension fund
? generally you can use your pension scheme to back up a mortgage, in much the same way as an endowment mortgage
? most of the plans have loanback facilities, which allows you to use your pension to get a loan.
STAKEHOLDER PENSIONS
Stakeholder pension schemes can be either occupational money purchase schemes or personal pension plans, but to earn the name they must meet these conditions:
? low charges : Charges must total no more than 1 percent a year of the value of your pension fund
? flexibility: The minimum contribution can be no more than ?20. You decide when or how often to pay
?portability: You can transfer out of a stakeholder scheme without penalty. Stakeholder schemes must accept transfers from other pension schemes and plans
? simplicity: The scheme must include a default investment option, if you don’t want to choose an investment fund for yourself
? information: You must get a statement at least once a year showing you the value of your scheme. If charges alter, you must be informed within one month of the change.
RETIREMENT ANNUITY CONTRACTS
If you had a personal pension scheme before 1 July 1988 (known as a retirement annuity contract), you will not be able to start drawing benefits from it until you are sixty, although you can convert it into a personal plan and thus start to take benefit from fifty onwards. If you retire early because of illness, you can start taking the pension earlier, but it will be less.
GETTING TAX RELIEF
Daniel Patten is considering putting money aside for retirement. His income for tax purposes for this year is ?40,000, so he is paying tax at 40 percent on the last slice of his income. If he invests ?5,000 in a personal pension, it would actually cost him only ?3,000, because he would otherwise pay tax at 40 percent on this ?5,000.
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