Guide to Pensions - in a nutshell
What is a Pension?
A Pension is simply a tax efficient way of building up a lump sum which can then be used as a means of providing you with a regular income for life. In theory any source of income whether from investments or even a lottery win can be used to provide a pension.
Why do I need a Pension?
For exactly the same reason that you need an income now! After all you still have to eat and keep warm as a minimum when you retire don't you? Unless you are absolutely certain of a large inheritance or windfall then you need to provide yourself with a secure income for life.
How much pension do I need at retirement?
Obviously, it depends on your needs and wants at that time.
What will you want to do? What will your day to day expenses be? If you need some help with this you may want to use the Budget Checklist. In general you should be asking yourself these questions:-
Once you come up with a figure and after adding in an amount as a cushion for the unforseen, then this is the amount of pension that you should ideally be planning for. You should also bear in mind that pensions are taxable so you will need to allow for income tax when arriving at your final pension figure.
I already have a pension plan so what should I be doing?
You should examine what the benefits of the scheme/plan are and whether they will give you the pension you want. If it is an employer's scheme you should be able to get a statement of your benefits from your employer, or you may wish to seek advice from an Independent Financial Adviser.
What type of Pension should I have?
This mainly depends on factors such as your employment status eg. self-employed, employed or controlling director, and also what benefits are available through your employer's scheme if there is one.
Personal/Stakeholder Pension Plan (PPP)
These plans are generally suitable if: -
Occupational/Company Pension Scheme(OPS)
These are employer run schemes with trustees who are responsible for the schemes being run properly, legally and fairly. If your employer has a scheme it is almost always in your interest to join because of the employer contribution which is, in effect, a tax-free benefit.
If these contributions are not enough to provide you with the pension you need, you can make further contributions through an Additional Voluntary Contribution arrangement (AVCs) or by taking out a separate Personal Pension Plan.
Director/Executive Pension Plan (EPP)
EPPs are company pension schemes designed for usually small numbers (sometimes one) of Directors and Senior Employees of Director/Shareholder run private companies. However unless already in force, EPPs have become virtually obselete since Pensions Simplification (A-Day).
SSASs and SIPPs
Small Self Administered Schemes and Self Invested Personal Pensions are similar to EPPs and PPPs which allow investment control of the funds by the pension plan holders. They can also be useful when property purchase (commercial) is required. SSASs and SIPPs cannot acquire directly held residential properties. New SSASs have become virtually obsolete since A-Day.
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