Pensions / Pensions

Pensions

Basic state Retirement Pension
It is a very common misconception that everyone is entitled to a full retirement pension from the government. The truth of the matter is that you build up rights to the basic State Pension over the course of your working life. The amount of pension you receive ultimately depends on the number of qualifying years you have worked. As an indivudual, you can’t refuse to contribute towards the State Pension.

If you are a man you need 44 qualifying years to get a full basic state Retirement Pension. If you are a woman who will reach age 60 before 2010, you need 39 qualifying years. However, when the state pension age becomes 65 for men and women (this is being gradually introduced from 2010 and will be in place by 2020), the number of qualifying years that a woman needs will increase to 44 years.

Some people do not get a full (100 per cent) basic state Retirement Pension because they have not paid enough contributions. They may only have worked for a few years, or they may have had earnings below a certain level (the lower earnings limit).

Married women who have chosen to pay a lower rate of National Insurance contributions will not have built up any more basic state Retirement Pension from the time that they chose to pay the lower rate.

The Government believes that the best way for you to have a secure retirement is to use the basic state Retirement Pension as a start. If you want to increase your pension for when you retire, you need to think about the best additional or second pension option for you.

Pensions for the self-employed
If you are self-employed, it is especially important that you think carefully about how to provide for your retirement. You’re not included in the additional state pension scheme (currently SERPS) and you have no employer to provide you with an occupational scheme. You can join a personal pension scheme and you can also join a stakeholder pension scheme.

There are many personal pension products available, but you need to get all the facts first. For example, you should ask what would happen if you couldn’t keep up payments, and if it would be better to pay in lump sums and less often.

Other state support
The Government offers a range of benefits to provide extra support to pensioners. In particular, the Government’s Minimum Income Guarantee (MIG), paid through Income Support, tops up the incomes of those pensioners who have little else to live on. Pensioners can also get help towards their housing costs, their council tax and the extra cost of  any disability.

The Government has set out proposals for developing a Pension Credit. This will need new legislation. This Credit will be designed to give extra help to pensioners with modest savings who have worked hard to provide for themselves.

Second pensions
You can build up a second pension (in addition to your basic state Pension) through the State, or by a private arrangement of some kind.

State Pension

•       The additional state pension, currently called the State Earnings-Related Pension Scheme (SERPS), is based on your record of National Insurance contributions and your level of earnings as an employee. The Government plans to reform SERPS in 2002 so that it provides a more generous additional state pension for low and moderate earners, and certain carers and people with a long-term illness or disability whose working lives have been interrupted or shortened. This will be called the State Second Pension.

Private pensions
There are a number of different private pension options for you to consider.

•       Occupational pensions - set up by employers for their employees.

•       Personal pensions - you usually get these from financial services companies, such as insurance companies, banks, investment companies or building societies.

•       Stakeholder pensions - you will be able to get these new low-cost, flexible, private second pensions from a range of financial service companies and other organisations such as trade unions. (see our section on stakeholder pensions).

What is an occupational pension?
An occupational pension scheme is an arrangement your employer makes alone, or with a group of other employers, to provide pensions for their employees when they retire. Occupational pension schemes may also pay you a tax-free lump sum when you retire, and may provide benefits for your dependants if you die.

What is a personal pension plan?
A personal pension plan is a way of making regular savings for your retirement. You can get a personal pension plan from financial services companies such as insurance companies, banks, investment companies or building societies. You usually pay into the plan every month, and your employer can also contribute to your plan. The money in your pension fund is invested to pay for a pension when you are older. But you may also have to pay charges to your pension scheme provider.

You will usually get tax relief on your contributions to a private pension scheme. This tax relief is available to everyone who pays into a personal pension scheme (even those who do not pay tax). With a basic rate of income tax of 22 per cent, every £100 that goes into your pension costs you £78 (based on the tax year 2001/02). If you pay income tax at the higher rate of 40 per cent, you can claim back the tax difference (compared with the basic rate income tax) from the Inland Revenue. So, with the higher rate of income tax at 40 per cent, every £100 that goes into your pension fund costs you £60 (based on the tax year 2001/02).

You can also arrange for part of your National Insurance contributions to be paid into your personal pension plan.

Reviewing your pension
You need to keep an eye on your pension arrangements regularly to make sure you will have the income you want when you retire. If you become better off, you may want to pay in more to build up your pension. When you review your pension and decide you want to increase it, you can do one of the following.

•       If you are in an occupational pension scheme, you may be able to pay more contributions. These are usually called additional voluntary contributions (AVCs).

•       You can also pay AVCs to another scheme provider (these are called free-standing AVCs or FSAVCs). The charges for FSAVCs are often higher than paying AVCs through your own occupational scheme, so check this.

•       If you are a member of an occupational pension scheme, new tax rules mean that you could use a personal pension or a stakeholder pension to build up an extra pension. You should check with your occupational pension scheme to find out if you can do this.

•       If you have a personal pension, you can increase your contributions or you can get another policy (but check what the charges are in each case).

In all cases, you should speak to your pension provider to see what charges are involved. You also need to think about the other available options before you decide to go ahead.