Retirement Planning
Most of us today are used to saving for our summer holiday. We usually know how much money is needed for the one or two week break, and save over a number of months to make sure they have enough money to enjoy ourselves.
However, when it comes to the longest holiday of their lives - retirement - the majority of people do not always make the plans needed to ensure they are able to enjoy this time to the full. Given the fact that it is becoming increasingly the norm that retirement can represent as much as a quarter of our lives, it is clear that careful consideration must be given to planning for retirement.
The choices for retirement planning are numerous and include Stakeholder & Personal Pensions, Company Pensions, Additional Voluntary Contribution Plans and also whether or not to opt-out of the State Second Pension S2P (was S.E.R.P.S - State Earnings Related Pension Scheme). The investment in your retirement should have the potential for substantial growth over the years, without compromising your principles.
The choices for retirement planning are numerous and include Stakeholder & Personal Pensions, Company Pensions, Additional Voluntary Contribution Plans and also whether or not to opt-out of the State Second Pension S2P (was S.E.R.P.S - State Earnings Related Pension Scheme). The investment in your retirement should have the potential for substantial growth over the years, without compromising your principles.
This section is intended to be a general guide to retirement planning for individuals (with an emphasis on the main options which can be linked to ethical and environmental funds). We have tried to cover as many different options as possible, and hope you will find at least one section relevant to your circumstances. If not, please contact us directly.
- My employer does not offer a company pension scheme
- What about contracting out of S.E.R.P.S?
- I am self-employed - what are my options?
- I have a pension left with a previous employer, is there anything I can do?
- I am a member of my employer's scheme, can I make extra provision for my retirement?
My employer does not offer a company pension scheme
For those who have no Company Pension Scheme available, or those who do not intend to remain for long with an employer offering a scheme, the most effective course of action would be to consider a Stakeholder Pension Plan.
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What about contracting out of the State Second Pension?
As you are probably aware, the State Pension Scheme is made up of both a basic pension and an earnings related portion, supported by National Insurance Contributions. Everyone must have the basic element paid by the state but can “contract-out” of the earnings related element. This means that each year an employee can ask the Department of Work and Pensions, via an insurance company, to pay a rebate of their National Insurance into their own pension plan. The hope is that the pension available at state retirement age saved via the personal pension plan will be greater than the S2P pension for that year.
The accumulated fund at retirement from the process of contracting-out is called “protected rights”. There are certain rules that accompany the money designated as protected rights – for example; whilst 25% of the fund can be taken as tax-free cash (as with the normal pension money), the remainder must buy a pension based on unisex rates and must allow for a spouses pension if the policyholder is married.
Whilst the state pension will undoubtedly change in the years to come, it should be remembered that the S2P scheme is by and large guaranteed, whereas contracting out through a personal pension plan involves risk. The return is dependant on stock market performance, meaning the benefits received at pension age under the personal pension could be lower than the S2P pension.
The Government has made the contracted out decision extremely complicated and it is difficult, if not impossible, for pension companies and Financial Advisers to give a firm recommendation. In general, if you trust the government (whatever party) to provide you with the additional pension benefits when you retire, and you prefer certainty, then you should probably decide to stay with S2P.
If, on the other hand, you prefer to take the money that you are paying towards S2P now and have it invested in our own name, in the hope of a higher return, then you should choose to contract out. Please note it is unlikely that anyone earning below £10,000 will be better off by contracting out.
Once you make your decision to contract out, you can elect to contract back in at a later date. The money already transferred to the pension company remains invested until you retire, at which time you'll get a payment from the government and a payment from the pension company.
You should also note that the government is proposing that contracting out will no longer be allowed past 2012, as it is their intention to scrap S2P.
I am self-employed - what are my options?
Obviously, becoming self employed means taking responsibility for your income now. It also means that you must consider making plans for the time you wish to retire. Relying on the possibility of being able to sell your business at the time you choose is not practical. It may be that without you the business would be worth nothing to someone else. Alternatively, the price offered at the time you want to retire may not allow you to do so, and you will be forced to continue to work until you are able to find a buyer at the right price.
Therefore, it is important to give serious consideration to making contributions to your own Stakeholder Pension. All of the payments you make are allowable as an expense against your tax liability. In addition, the contributions will be invested in a tax-free fund and on retirement you will be able to take up to 25% of your accumulated fund as a tax free lump sum.
If you wish to gradually phase-in your retirement, a Stakeholder Pension will allow you to stagger your retirement to suit your needs. The benefits from your plan can begin at any time from age 55 - the choice is yours.
Contributions can start from as little as £20 per month, and payments can be made monthly or annually. In addition, you are able to make one-off lump sum payments at any time, if this is more suitable to your circumstances.
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I have a pension left with a previous employer, is there anything I can do?
The simple answer is yes. If you have left the service of an employer and were part of a Company Pension Scheme, then the money accumulated in the scheme will probably be left with the employer. It is now possible, in most cases, to transfer these accumulated benefits to a plan in your own name, and for the money to be invested ethically.
For some, it will not be in their interests to make a transfer, and our reports clearly identify these instances. In this field, independent advice is critical. As the pension transfer area is now highly specialised, Ethical Investors has an in-house pension transfer specialist who will who will prepare reports for our clients.
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I am a member of my employer's scheme, can I make extra provision for my retirement?
As a member of a company pension scheme, the prospect of 'topping up' your company pension to provide higher benefits may well appeal to you. There are a number of ways to increase your income in retirement. These are: -
- Buy added years in the main scheme. Not all schemes allow this, but most do. It can be expensive, but is worth considering as the first step.
- Additional Voluntary Contributions - most employer schemes offer an extra investment-linked pension to use for topping up your retirement income, if you don't want to buy added years. There are two types of AVC; the in-house scheme which is a bolt on to the main scheme, and the Free Standing AVC, which is a private AVC that you can buy from any pension company offering an ethical fund in line with your principles.
- Stakeholder Pension – an ethically invested (if you choose) low cost private pension (see our Stakeholder Pension Guide link to stakeholder site).
In deciding whether to buy added years, use an AVC, a Stakeholder Pension or even an ISA, ask yourself these questions:-
- Will I have been with my employer long enough, by the time I retire, to qualify for maximum retirement benefits?
- Will my pension increase in retirement?
- Does the company scheme take account of my bonus, commission or overtime earnings?
- Can I afford to retire early from the company scheme?
If you answer No to any of the above, you may wish to consider making contributions to an ethical/green additional retirement plan. Choosing the right type of plan is where you will need the services of an IFA.
17/07/09