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 arrangement such as a 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.

HOW MUCH PENSION DO I NEED AT RETIREMENT?

Obviously, it depends on your needs and wants at that time.

What will you want to do? What will your day to day expenses be? 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? Crosswords are cheap - World Cruises are expensive!
• 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.

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.

For further help and advice click here to get expert advice from McCrea Financial Services.

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.

Personal/Stakeholder Pension Plan (PPP)

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 and wish to take out further benefits outside of the Group Personal Pension Plan.
• You do not have any earnings, as you can make contributions up to £3,600 gross pa.

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 (EPP)

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 is because in the past they allowed higher contributions than PPPs.

SSASs and SIPPs

Small Self Administered Schemes and Self Invested Personal Pensions 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, or holiday homes.

Personal Contributions

Individuals can contribute the higher of £3,600 and 100% of their “UK Relevant Earnings”

For individuals earning under £150,000 a year personal contributions receive tax relief at the individual’s highest marginal rate. Basic rate tax relief is given at source. Higher rate relief, where applicable, is reclaimed by an adjustment to the individual’s tax code or through their annual tax assessment.

Following the recent budget announcement, pension tax relief for those earning over £150,000 a year will be capped. This will be implemented from April 2011, in the meantime, there are interim measures that will affect those earning over £150,000 where more than £20,000 is paid into the Pension. For more information on this please refer to McCrea Financial Services.

Employer Contributions

Employer contributions (if applicable) are unlimited, but are subject to HMRC accepting them as a justifiable business expense. This will be the responsibility of each local Inspector of Taxes. Where employer contributions are made to an individual with earnings over £150,000 this will be taken into account against the £20,000 limit. A special tax charge will be based on any excess pension provision above the £20,000 level. The rate of tax will be based on the difference between the individual’s highest rate of income tax and the basic rate of income tax (currently 20%).Subject to conditions it may be possible to increase the contribution maximum to £30,000 whilst retaining all the tax breaks, please refer to McCrea Financial services for further information.

The exception to this would be for individuals earning above £150,000 who already have in place a regular pattern of Pension funding (at least quarterly) and who do not accelerate this normal pattern of funding. For more information on this please refer to McCrea Financial Services.

Holiday Homes / Buy to Let

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

RETIREMENT AGE

Your pension benefits can usually be accessed at any stage between 50 and 75 years of age. If you wish to draw your pension before retiring, you can continue to work and draw your pension benefits at the same time.

The earliest age from which pension benefits can be accessed rises to age 55 from April 2010.

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 factors will be the size of your fund and your objectives, which will dictate when and if you can afford to retire.

If you are considering accessing your pension benefits before age 55, you will need professional advice now. Contact McCrea Financial Services for further information.

AGE 75

The recent 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).

Basically this allows you to keep your pension fund invested and to draw an income from the fund. 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 fairly 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 pension rules dictate if your pension fund is worth more than £1.75 million (2009/2010), there will be penalties should you wish to access the pension money.

If your pension fund has a significant value, then there are a number of options potentially available to ring-fence existing amounts ensuring that no additional tax charges are levied. If you are in this area you need advice now!

Contact enquiries@mccreafs.co.uk for further information