Creating Wealth, Making Money, Investing Wisely, Pensions

April 6, 2006, saw the UK government simplify many of the rules and laws with regards to pensions, making them easier to understand, more flexible, and enabling people to invest in more than one pension at any one time.  Pension reform has therefore widened the options and enabled the development of new products.  For instance, there’s a big relaxation as to the way that individuals can take their money when they wish to retire.  There is the opportunity to draw upon assets through annuities and to draw out pension drawdowns so they can change the amount of money they receive actually on retirement.

 Self-invested personal pension schemes are tax-efficient and allow both regular and lump sum cash payments with full tax allowance and tax breaks up to the maximum level, which is 100% of the annual salary up to £245,000 a year.  As an employed person, employers are allowed to pay into SIPPs and there’s a wide range of sourcing for the SIPPS, which include commercial property shares and unit trusts.

Individual Contributions

There is no limit to the amount that an individual can contribute, but there may be limits on the amount of contribution which will receive full tax relief and therefore full benefit for the individual.  Any amount of money that is paid into a pension in an occupational scheme that is not paid by an employer is classed as a member’s contribution.

Occupational schemes based on money purchase mean that the contributions are invested normally in the stock market or in different funds.  Therefore, the payout when the pension matures will be based on how these investments have performed.  There will be no guarantee as to the level of pension, which will be taken, so it is down to the performance of the fund and therefore the fund managers over the period of time the investments that have been made.

These offer a guaranteed pension amount, which is based on the salary of the employee and the amount of service that he has given to the employer.  These are typically based on 1/80 or 1/60 of the salary and are based on the number of year of service.

Employers can set up occupational schemes for their employees.  In the public sector, a public sector occupational scheme will typically remunerate 1/80 of final salary for each year of service with a maximum multiple of 40 years of service and this will be in addition to 1.5 x final remuneration salary.  With private sector schemes, which are either defined benefit schemes or money purchase schemes (known as defined contribution schemes), the level of income will be dependent on either the defined benefit or the contribution.