What’s a Pension?
Basic State Pension - this currently pays £84.25 per week for a single person and is at the heart of most peoples thinking when they consider pensions. There are mimimum National Insurance contribution levels which you need to have reached over your working life or be credited with, to receive the full pension amount. Even so, it’s really not very much and most people need this to be topped up considerably to reach realistic income levels to retire on.
To help you to further top up you can receive pension credit (which brings you up to minimum income levels - for more on Pension Credit click here) and SERPS (the State Earnings-Related Pension Scheme). Following from recent reforms resulting in the Pension Act 2007 this is now known as the State Second Pension and is paid in addition to the basic state pension. The amount you will receive is again based upon the amount of national insurance you’ve paid.
You may contract out ie ‘opt out’ of the State Second Pension and instead reinvest the sum the government will repay you (for your National Insurance contributions) privately. It’s important to receive specialist independent financial advice should you wish to consider this option. It’s almost certain however, you will need to supplement the Basic State Pension yourself with other means.
Personal Pension Plan
Personal Pension - these are designed to offer a lump sum and income in retirement. You can purchase this type of investment from insurance companies, banks, investment organisations and also through some supermarkets and high street retailers. These type of pensions are known as ‘money purchase arrangements’ and build up a fund for the individual by investing the money members place into it.
The amount of pension payable upon retirement depends upon:
* how much money has been invested in the scheme
* how well the chosen investment funds perform
* the ‘annuity rate’ current when you retire. An annuity rate is the calculation which will then be used to convert the fund you’ve saved into a pension.
At present you may retire anywhere between the ages of 50 and 75, but the minimum age changes from 50 to 55 from 6 April 2010
You may be able to take up to 25% of your final fund as a tax-free lump sum. The rest must be used to purchase an annuity with an insurance company.
Within this section there are also ‘Special Personal Pensions’. These include the following which will be dealt with in separate article in detail…
* SIPPS - Self Invested Personal Pensions
* SASSs - Small Self Administered Schemes
* EFRBS - Employer-Financed Retirement Benefit Scheme