Pension Plans

Summary

Personal Pensions
This popular type of pension, available to both employed and self employed people, is designed to build a fund to produce an income upon retirement between ages 55 and 75. Contributions, which can be made net of basic rate tax are invested to build an investment fund. Higher rate tax payers may claim back the higher relief through their tax returns. When the pension is vested, part of the accumulated fund (up to one quarter) may be taken as a tax-free cash lump sum with the rest being used to ‘buy’ an income (see Income in Retirement).

Stakeholder Pensions (SHP's)
SHP's have been available since April 2001. In many ways similar to personal pensions, these are designed to have low charges and extreme flexibility.For a pension to be classified as a SHP it must met standards laid down by the government. 

Occupational Pensions
Often called ‘executive’ pensions, these are established by the employer to provide a retirement fund for employees or directors. Members of the scheme may choose their own retirement date usually between ages 55 and 75 and are subject to Inland Revenue limits and scheme rules. The accumulated fund may be taken partly as a tax-free cash lump sum with the rest being used to ‘buy’ an income.

Annuities
An annuity is an income, usually for life, which is bought from an insurance company, usually with the proceeds of a pension fund. The fund may be used to buy an annuity at any time between the age of 55 and 75. Annuity income may be paid either on a level basis or with a built in increase to take into account rises in the cost of living. Payments may be guaranteed for a certain period of time, ensuring a continuing income, during the guaranteed period, to the estate upon death. Provision may also be made for a lesser income to be paid to spouse or dependants upon death. ‘Lifestyle’ or ‘impaired life’ annuities may be offered to some people who have a reduced life expectancy due to ill health or habits such as smoking etc.

Phased Retirement
This is a flexible facility whereby the pension plan may be divided into segments which may be individually ‘encashed’ to provide a combination of tax-free cash lump sum and annuity at any time between ages 55 and 75. 

Pension Fund Withdrawal
Often called ‘pension drawdown’ this enables the maximum tax-free cash lump sum to be taken at retirement but delays the purchase of an annuity. The residual fund will remain invested and produces income by way of encashing part of the fund subject to minimum and maximum limits set by the Government. At age 75 the remaining fund is used to buy an annuity.

Emergency Budget 22nd June 2010. It is proposed that the requirement to take an income at age 75 will be removed from 2010/11. Legislation will be introduced in the Finance Bill 2010 and, in the interim, the limit will be raised to age 77.

This summary in no way constitutes the complete explanation of pension plans or how they may suit you. For further details of pension plans and how these may help your personal circumstances please seek independent advice.