Pensions

The pension and benefits arena is becoming more and more complex and we at Eastwood & Partners (Financial Services) Ltd believe in providing clients with pragmatic advice tailored to fit specifc needs. We do not have a house view or single strand solution that we try and impose in every case; each client is different with different goals, pressures and contsraints, and we react accordingly.

_{WHAT IS A PENSION?}
A Pension is simply a tax efficient way of building up a lump sum, which is then used as a means of providing you with a regular income for life upon retirement. In theory, any source of income whether from investments or even a lottery win can be used to provide a pension.
For most people though, a pension product such as a Stakeholder / Personal Pension Plan, or an Occupational Pension Scheme provided by an employer (supplemented by personal contributions) will be the way to achieve their pension goals.

_{WHY DO I NEED A PENSION?}
For exactly the same reason that you need an income now! After all, you still have to eat and keep warm as an absolute minimum when you retire. Unless you are absolutely certain of a large inheritance or windfall then you need to provide yourself with a secure income of a level comfortable enough to sustain the rest of your life.

A good pension plan reviewed regularly should go some way to provide a reasonable level of income in retirement. A pension plan requires action as soon as possible, so start now and if you have already started, take the opportunity to have a closer look at your existing arrangements to make sure you are on track. Better still give us a call and we will be able to professional assist you.

_{HOW MUCH PENSION DO I NEED AT RETIREMENT?}Obviously, it depends on your needs and wants at that time.

In general you should be asking yourself these questions: -
What will the costs of day to day living be for me (and my partner) in retirement?
What else will I want to do in view of the additional time available?

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What expenses will disappear e.g. children, mortgage, saving for retirement?

Once you come up with a figure and after adding in an amount as a cushion for the unforeseen, then this is the amount of pension that you should ideally be planning for. You should also bear in mind that pensions are taxable so you will need to allow for income tax when arriving at your final pension figure. Eastwood & Partners (Financial Services) Ltd will be able to appropriately guide you through the complex maze when building a retirement fund pre-retirement and again on releasing retirement benefits at-retirement.
_{I ALREADY HAVE A PENSION SO WHAT SHOULD I BE DOING?}You should examine what the benefits of the scheme / plan are and whether they will give you the pension you want . If it is an employer's scheme you should be able to get a statement of your benefits from your employer outlining the benefits. Alternatively, contact us and we can analyse your current provisions and discuss the possible future pension level.

For a personal pension, in the early years of putting away contributions it will be the level of contributions, that drive the size of your pot. However, as the years go by your pot will increase and eventually get to a size where the investment returns drive the size of your pot. The larger your fund, the more advice you need on getting your fund to perform at the optimum level, because every % increase or decrease can be worth potentially thousands.
The most important thing is to regularly assess your benefits and whether they will meet your objectives.

_{WHAT TYPE OF PENSION SHOULD I HAVE?}This mainly depends on factors such as your employment status e.g. self-employed, employed or director, and also what benefits are available through your employer's scheme if there is one.

Stakeholder Plan / Personal Pension Plan (PPPs)
These plans are generally suitable if:
• You are employed and do not have access to an Occupational Pension Scheme.
• You are self-employed.
• You are employed and are a member of a Group Personal Pension Plan or even an existing Occupational Pension Scheme where you wish to increase benefits further by contributing to a private pension.
• You do not have any earnings, as you can make contributions up to £3,600 gross p.a.

Occupational/Company Pension Scheme (OPS)
These are employer run schemes with trustees who are responsible for the schemes being run properly, legally and fairly. If your employer has a scheme it is almost always in your interest to join because of the employer contribution which is, in effect, a tax-free benefit.

Director / Executive Pension Plan (EPPs)
EPPs were company pension schemes designed for usually small numbers (sometimes one) of Directors and Senior Employees of Director / Shareholder run private companies. One of the main reasons why EPPs were used in preference to PPPs was because in the past they allowed higher contributions than PPPs.

Small Self Administered Schemes (SSAS) & Self Invested Personal Pensions (SIPPs)
SSAS and SIPPs are similar to EPPs and PPPs which allow investment control of the funds by the pension plan holders. They can also be particularly useful when property purchase (commercial) is required. For the avoidance of doubt, SSASs and SIPPs cannot acquire individual residential properties.

_{CHANGES TO PENSION RULES FROM 2006}There were a number of radical changes in the Pensions Act 2004 and included within this was pension tax simplification which replaced the previous eight seperate pension tax regimes with one regime. The implementation date for pension simplification was 6 April 2006, otherwise known as 'A-Day'. This is still a very complex area.

A quick overview at this current time in the 2009 / 2010 tax year is as follow. It is advisable that a meeting with an adviser at Eastwood & Partners (Financial Services) Ltd is arranged to determine how the full technicalities affect you in your individual circumstances;

There are now considerable tax advantages for larger personal payments for those with earnings far into the higher rate tax bracket. You can pay up to 100% of salary (capped at £245,000 in 09/10) into a pension plan in any given tax year, whilst receiving full tax relief.
The tax relief for higher-rate taxpayers for a Personal Pension is given in 2 parts. An immediate uplift of 20% is applied to a personal pension payment, with a further 20% being claimed back via a self- assessment return.

With a Company or Public Service Pension scheme the employer usually takes the pension contributions from pay before deducting tax (but not National Insurance contributions). Such an individual only pay tax on what's left. So whether taxed at basic or higher rate the full tax relief occurs straightaway. However, some employers use the same method of paying pension contributions that personal pension scheme payers use.

Personal Pensions Contributions

You pay Income Tax on your earnings before any pension contribution, but the pension payer claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference (an additional 20%) through your tax return or by making a claim to HM Revenue & Customs (HMRC) by telephone or letter.

Retirement annuities

Unlike personal pension providers, most retirement annuity providers - personal pension schemes set up before July 1988 - don't offer a 'relief at source' scheme whereby they claim back tax at the basic rate. Instead you'll need to claim the tax relief you're due through your tax return, or if you don't complete a tax return by telephoning or writing to HMRC.

Company Contributions
Additionally your company can also potentially contribute up to a combined total of £245,000 per annum (09/10), whilst still receiving all tax benefits. So for example in the years close to retirement your company can potentially pay significant monies into the pension in a short space of time.

Whether personal or employer contributions, the allowable limit varies each tax year and is based on the Input Year of the pension. The Input Year begins/began when the first payment after 5th April 2005 was paid into the plan and ends 364 days later. The allowable contributions are based on the tax year in which the last day of the Input Year falls.

Holiday Homes / Buy to Let
Although there was much excitement about holding buy to let or holiday homes within the pension this was effectively sidelined, the chancellor added significant tax penalties making this option a non-starter.

By April 2010, the minimum age at which you you'll be able to take your company or personal pension will have increased from 50 to 55. However, you may still be able to take your pension before 55 in certain circumstances, for example if you are unable to work due to ill-health. Your pension administrator will be able to tell you what a scheme allows.
Your pension benefits can usually be accessed at any stage between 50 (55 from April 2010) and 75 years of age. If you wish to draw your pension before retiring, you can continue to work and draw your pension benefits.

There are a number of different options to access your pension funds, including drawing an income from the fund, phasing in payments including tax-free sums, taking an annuity / ill health annuity, or indeed a combination of the above. The overriding factor will be the size of your fund which will dictate when and if you can afford to retire.

_{OPTIONS ON REACHING AGE 75}The changes in pension legislation mean that you are not forced to purchase an annuity / ill health annuity at age 75. Instead, you can opt for what is known as an ‘Alternatively Secured Pension’ (ASP).

ASP is similar to income drawdown which allows you to keep the pension fund invested and draw and income from the fund although if you have not taken any tax free cash from the plan you will not be able to do so, and the income you can take is more restricted, to reduce the risk of running down your retirement fund early.

Although current legislation is clear that ASP is available to everyone, the government has indicated that it may try to limit it to certain types of religious groups. ASP is not available with all stakeholder pensions and therefore you may have to transfer to an alternative pension.

However, whilst this may be attractive for many, the tax charges that will apply on passing away are unlikely to make this a viable option. This is an area that is complex and professional advice will be essential.

_{FUND SIZE / INHERITANCE TAX}
Given the tax relief on offer from pensions and the fact that to a great extent much of pension planning can be free of Inheritance Tax, the new rules dictate if your pension fund is worth more than £1.75 million (2009/20010), there will be penalties should you wish to access the pension money.

Particularly those in senior positions, such as those high up in the NHS, who are higher earners and have many years service could quite easily fall into this bracket.
If your pension fund is valued at over £1.75 million, then there are a number of protection facilities that are offered to ring-fence existing amounts to ensure that no additional tax charges are levied.

You needed to review this before 6 April 2009 and ideally this should have been a lot earlier, as any pension contributions made after April 2006 could affect this.